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ECONOMICS 

IN  TWO  VOLUMES 


Volume  I 
ECONOMIC  PRINCIPLES 


MODERN  ECONOMIC  PROBLEMS 

By 
Fbajtk  a.  Fbttee 

This  text  makes  practical  application  of  the  theories 
treated  in  "Principles  of  Economics"  to'  such  matters 
as  money,  banking,  international  trade,  labor  organiza- 
tions, agricultural  economics,  trusts,  taxation,  insurance, 
immigration,  and  similar  topics.  The  book  was  com- 
pletely revised  in  1922;  hence  it  considers  economic 
matters  in  the  light  of  the  changed  conditions  following 
the  World  War.  The  volume  is  equipped  with  charts, 
diagrams,  statistical  tables,  reference  reading  lists,  and 
other  numerous  helps  for  both  the  teacher  and  the 
student. 

8  vo  611  pages  Price  $2.75 


Bconomics— IDolume  1 


ECONOMIC  PRINCIPLES 


BY 


FRANK  A:;|ETTER,  PH.D.,LL.D. 

PROFESSOR  OF  POLITICAL  ECONOMY.  PRINCETON  UNIVERSITY 


>***^V^ 


NEW  YORK 
THE  CENTURY  CO, 


COPYRIGHT,  1915,  BY  THE  CENTURY  CO. 
ALL  RIGHTS  RESERVED,  INCLUDING  THE 
RIGHT  TO  REPRODUCE  THIS  BOOK,  OR 
PORTIONS  THEREOF,  IN  ANY  FORM.  380 


in  I 

V.I 


*aiNTED     IN     U, 


TABLE  OF  CONTENTS 


Part  I.    Elements  of  Value  and  Price.  page 

1.  Purpose  and  nature  of  economics 3 

2.  Choice  and  value 12 

3.  Goods  and  psychic  income 22 

4.  Principles  of  evaluation 31 

5.  Trade   by   barter 42 

6.  Money  and  markets 50 

7.  Principles    of    price 61 

8.  Competition  and  monopoly 73 

Part  II.    Usance  and  Rent. 

9.  Agents  for  changing  stuff  and  form 89 

10.  Agents  for  effecting  changes  of  place  and  time   ....  101 

11.  Consumption  and  duration Ill 

12.  The   principle   of    proportionality 122 

13.  The  concept  of  usance-value 135 

14.  The  renting  contract 143 

15.  Principles    of    rent 158 

Part  III.    Valuable  Human  Services,  and  "Wages. 

16.  Human  beings  and  their  economic  services 171 

17.  Conditions    for    efficient   labor 184 

18.  Tlie  value  of  labor  and  the  choice  of  occupations   .      .      .  197 

19.  Principles  of  wages 211 

Part  IV.     Time-value  and  Interest. 

20.  Time-preference 235 

21.  Rate  of  time-preference 248 

22.  Money  and  capitalization 262 

23.  Capitalization   of  monetary   incomes 273 

24.  Saving  and  borrowing 285 

25.  Capitalization  and  interest 300 


TABLE  OF  CONTENTS 

Part  V.    Enterprise  and  Profit.  page 

26.  Enterprise 317 

27.  Management 327 

28.  Profits  and  costs 343 

29.  Various   shades   of   profits 358 

30.  Costs   and   competitive   prices 369 

31.  Monopoly-prices;    large  production 381 

Part  VI.    Dynamic  Changes  in  Economic  Societt. 

32.  The  problem  of  population 399 

33.  Volitional  doctrine  of  population 414 

34.  Decreasing  and  increasing  returns 426 

35.  Basic  material  resources:  their  use,  consumption,  and  con- 

servation   442 

36.  Machinery    and    wages    . 456 

37.  Waste   and    luxury 468 

38.  Abstinence  and  production 482 

39.  Value  theory  and   social  welfare 500 

Index 515 


FOREWORD 

The  author's  "Principles  of  Economics"  published  in  1904 
aimed  to  present  a  unified  theory  of  distribution  under  the 
conditions  of  the  modern  price  system.  Value,  rent,  wages, 
and  interest  were  for  the  first  time  in  a  general  text  treated 
as  different  manifestations  of  the  same  general  principles, 
not  as  contrasted  phenomena  each  governed  by  a  law  of  a 
different  nature.  The  present  text  develops  this  plan  fur- 
ther and  seeks  to  bring  out  more  clearly  on  the  theoretical 
side  important  distinctions  such  as  those  between  the  indi- 
vidual psychology  of  value  and  market  price,  static  and 
dynamic  conditions,  temporary  and  more  permanent  changes, 
commercial  and  welfare  problems. 

This  text  of  "Economic  Principles"  seeks  to  answer  the 
practical  needs  of  our  society  as  it  is  today  better  than  does 
the  older  analysis  which  has  become  conventionalized  in  col- 
lege texts.  Illustrations  of  principles  are  drawn  almost  en- 
tirely from  contemporary  American  conditions.  A  number 
of  practical  applications  of  the  principles  are  treated  in  a 
second  volume  "Modern  Economic  Problems"  (revised  1922  ), 
dealing  with  the  facts,  theories,  and  public  policies  relating  to 
money,  banking,  international  trade,  labor  organizations, 
agricultural  economics,  trusts,  taxation,  insurance,  and  other 
topics. 


ECONOMIC  PRINCIPLES 

PART  I 
ELEMENTS  OF  VALUE  AND  PRICE 


ECONOMIC  PRINCIPLES 

CHAPTER  1 
PURPOSE  AND  NATURE  OF  ECONOMICS 

§  1.  Definition  of  economics.  §  2.  Economics  contrasted  with  the  nat- 
ural sciences.  §  3.  Science  as  abstraction.  §  4.  Science  and  art.  §  5. 
Place  of  economics  among  the  sciences.  §  6.  Subdivisions  of  economics. 
§  7.  Economy  in  the  sense  of  the  subject  studied.  §  8.  Economy  not 
parsimony.  §  9.  Social  aims  of  economics.  §  10.  Economics  in  a  democ- 
racy.   Note  on  Economic  laws  and  other  terms. 

§  1.  Definition  of  economics.  Economics  may  be  defined, 
briefly,  as  the  study  of  men  earning  a  living;  or,  more  fully, 
as  the  study  of  the  material  world  and  of  the  activities  and 
mutual  relations  of  men  so  far  as  all  these  are  the  objective 
conditions  to  the  gratification  and  to  the  welfare  of  men.  The 
ideas  of  most  persons  on  this  subject  are  vague,  yet  it  would 
be  very  desirable  if  the  student  could  approach  this  study 
with  an  exact  understanding  of  the  nature  of  the  questions 
with  which  it  deals.  Until  a  subject  has  been  studied,  however, 
a  definition  in  mere  words  but  slightly  aids  in  marking  it  off 
clearly  in  our  thought.  The  student  must  first  try  to  see 
the  general  field  of  facts  and  of  human  interests  that  eco- 
nomics covers. 

§  2.  Economics  contrasted  with  the  natural  sciences. 
Economics  may  be  contrasted  with  the  natural  sciences,  which 
deal  with  material  things  and  their  mutual  relations.  A  defi- 
nition that  suggests  clear  and  familiar  thoughts  to  the  student 
seems  at  first  much  more  difficult  to  get  in  economics  than  in 
the  natural  sciences.    These  deal  with  concrete,  material  things 

3 


4  ELEMENTS  OF  VALUE  AND  PRICE        [Pt.  I 

which  we  are  accustomed  to  see,  handle,  and  measure.  If  a 
child  is  told  that  botany  is  a  study  in  which  he  may  learn 
about  flowers,  trees,  and  plants,  the  answer  is  fairly  satisfying, 
for  he  at  once  thinks  of  many  things  of  that  kind.  "When,  in 
like  manner,  zoology  is  defined  as  the  study  of  animals,  or 
geology  as  the  study  of  rocks  and  the  earth,  the  words  call 
up  memories  of  many  familiar  objects.  Even  so  difficult  and 
foreign-looking  a  word  as  ichthyology  seems  to  be  made  clear 
by  the  statement  that  it  is  the  name  of  the  study  in  which  one 
learns  about  fish.  It  is  true  that  there  may  be  some  misun- 
derstanding as  to  the  way  in  which  these  subjects  are  studied, 
for  botany  is  not  in  the  main  to  teach  how  to  cultivate  plants 
in  the  garden,  nor  ichthyology  how  to  catch  fish  or  to  propa- 
gate them  in  a  pond.  But  the  main  purpose  of  these  studies 
is  easily  made  clear  at  the  outset;  it  is  to  know  about  the 
natural  objects  themselves.  It  is  true  that  as  each  science 
is  pursued,  and  knowledge  widens  to  take  in  the  manifold  and 
various  forms  of  life,  the  boundaries  of  the  special  sciences 
become  not  more  but  less  sharp  and  definite. 

In  contrast  with  these,  economics  is  one  of  the  social  sciences 
which  deal  with  the  inner  nature  of  men  and  with  men's 
relations  in  society.  These  are  less  tangible  facts — we  are 
tempted  to  say  that  they  are  less  familiar — than  are  the  ma- 
terials with  which  the  natural  sciences  deal.  But  the  truth 
may  be  that  social  acts  and  relations  are  more  familiar  to 
our  thought  than  is  the  subject  matter  of  the  physical  sciences. 
Every  hour  in  the  streets  and  stores  one  may  witness  thou- 
sands of  acts,  such  as  bargains,  labor,  and  payments,  that  are 
the  data  of  economic  science.  Their  very  familiarity  causes 
us  to  overlook  their  deeper  meaning. 

§  3.  Science  as  abstraction.  A  science  by  its  very  nature 
as  science  is  concerned  primarily  with  abstractions  rather  than 
with  concrete  objects.  To  think  scientifically  is  to  think  ab- 
stractly. Abstraction  is  a  certain  way  of  looking  at  things; 
it  is  looking  at  their  qualities.  It  is  more  difficult  to  think 
abstractly  than  it  is  to  think  of  concrete  things.    It  implies 


Ch.  1]  PURPOSE  AND  NATURE  OF  ECONOMICS  5 

an  analysis,  a  taking-apart  of  things  to  get  at  their  components, 
and  a  grouping  of  these  parts  into  some  general  idea — not  an 
easy  task  for  most  minds.  Economics  singles  out  for  study 
those  aspects  of  the  world  which  have  to  do  with  man's  desire 
for  the  things  about  him  and  the  use  that  he  makes  of  them. 

Economics  *'as  the  study  of  the  material  world"  also  has 
to  do  with  all  of  those  things  which  are  the  subject-matter 
of  the  natural  sciences;  but  only  in  a  secondary  way.  It 
studies  them  only  as  they  are  related  to  man's  welfare,  or  as 
they  affect  his  valuation  of  things ;  only  in  so  far  as  they  are 
related  to  the  central  subject  of  economic  interest,  the  earning 
of  a  living. 

§  4.  Science  and  art.  Like  every  other  field  of  study, 
economics  has  two  aspects,  one  of  science,  the  other  of  art; 
the  one  of  knowledge,  the  other  of  action;  the  one  of  prin- 
ciples, the  other  of  their  application.  Each  science  seeks  to 
study  and  to  understand  the  world  in  some  aspect,  to  reduce 
the  multitude  of  facts  to  order,  and  to  understand  their  rela- 
tions. Thus,  astronomy  has  succeeded  in  counting  a  large 
number  of  heavenly  bodies,  classifying  them  as  stars,  planets, 
comets,  etc.,  has  come  to  understand  their  relations  in  space, 
distances,  direction,  and  speed  of  movement,  etc.  On  this 
science  is  based  such  practical  arts  as  navigation,  regulation 
of  the  calendar,  determination  of  the  exact  time,  prediction  of 
eclipses,  etc.  Thus,  likewise,  physics,  chemistry,  the  various 
branches  of  biology,  psychology,  etc.,  are  concerned  first,  and 
merely  as  science,  with  the  truth  regardless  of  its  application. 
Then,  however,  whatever  truth  is  discovered  may  be  found  to 
be  capable  of  some  uses  or  applications,  either  in  the  hands  of 
the  scientists  themselves  or  in  the  hands  of  another  body  of 
men,  variously  named  practical  workers,  technicians,  and 
inventors,  who  develop  the  art  side  of  the  subject.  The  history 
of  civilization  abounds  with  evidence  showing  that  the  work 
of  the  group  of  scientific  workers  continually  pursuing  truth 
for  its  own  sake  (work  little  esteemed  by  the  world  in 
general),  is  indispensable  for  the  continued  progress  in  the 


6  ELEMENTS  OF  VALUE  AND  PRICE       [Pt.  I 

practical  arts.  Just  outside  the  circle  of  attained  scientific 
knowledge  is  a  fringe  of  possible  practical  applications.  But 
unless  other  and  still  other  discoveries  were  made,  practical 
progress  in  the  arts  would  lose  its  source  of  inspiration. 

§  5.  Place  of  economics  among  the  sciences.  Economics 
seeks  the  reason,  connection,  and  relations  in  the  great  multi- 
tude of  acts  arising  out  of  the  dependence  of  men  on  the  world 
of  things  and  of  other  men.  Economics  has  to  study  men  in 
two  sets  of  relations,  as  is  indicated  in  the  definition:  the 
relation  on  the  one  hand  of  man  to  material  (non-human) 
things  about  him,  and  on  the  other  hand  to  other  men  with 
whom  he  has  "economic"  dealings.  In  so  far  as  economics 
is  concerned  with  the  former,  the  relation  of  man  to  his  ma- 
terial environment,  economics  borders  on  some  phases  of  each 
of  the  engineering  sciences,  and  of  the  natural  sciences,  as 
geology,  botany,  zoology,  and  (in  considering  how  these  things 
affect  man)   physiology  and  psychology. 

In  so  far  as  economies  is  concerned  with  the  mutual  rela- 
tions of  men  in  business,  it  becomes  one  of  the  group  of  social 
sciences.  The  word  "social"  comes  from  the  Latin  socius, 
meaning  a  fellow,  comrade,  companion,  associate.  The  social 
sciences  deal  with  men  and  their  relations  with  each  other. 
As  men  living  together  have  to  do  with  each  other  in  a  great 
many  different  ways,  and  enter  into  a  great  many  different  re- 
lations, there  arise  many  different  social  problems,  and  the 
several  social  sciences  of  politics,  law,  ethics,  and  economics. 
Each  of  these  attempts  to  study  social  relations  in  some  one 
important  aspect,  that  is,  to  view  them  from  some  one  stand- 
point. Politics  treats  of  the  form  and  working  of  govern- 
ment, and  is  mainly  concerned  with  the  question  of  power  or 
control  of  the  individuars  actions  and  liberty.  Law  treats  of 
the  rules  of  the  sovereign  state  controlling  the  actions  of  men 
(criminal  jurisprudence),  and  of  the  principles  guiding  the 
interpreting  of  the  contracts  into  which  men  see  fit  to  enter 
in  their  economic  affairs  (civil  jurisprudence).  Ethics  treats 
the  question  of  right  and  wrong,  and  the  moral  aspects  of 


Ch.  1]  PURPOSE  AND  NATURE  OF  ECONOMICS  7 

men's  acts  and  relations  with  each  other.  As  compared  with 
these,  economics  is  a  much  less  purely  social  science ;  it  has  to 
do  almost  constantly  with  the  material  environment  as  well 
as  with  the  social  environment  in  which  men  live. 

The  attempt  to  distinguish  between  the  fields  occupied  by  the 
various  social  sciences  discloses  at  once  a  fundamental  unity 
existing  among  them.  The  acts  of  men  are  closely  related  in 
their  lives,  but  they  may  be  looked  at  from  different  sides. 
The  central  thought  in  economics  in  its  social  aspect  is  the 
business  relation,  the  relation  of  men  in  working  together,  or 
in  exchanging  their  services  and  material  goods.  In  pursu- 
ing economic  inquiries  we  come  into  contact  with  political, 
legal,  and  ethical  considerations,  all  of  which  must  tie  recog- 
nized before  a  final,  practical  answer  can  be  given  to  any  ques- 
tion. Nevertheless,  the  province  of  economics  is  limited.  It 
is  because  of  the  feebleness  of  our  mental  power  that  we  divide 
and  subdivide  these  complex  questions  and  try  to  answer  cer- 
tain parts  before  we  seek  to  answer  the  whole.  "Whoever  at- 
tempts this  final  and  more  difficult  task  should  rise  to  the 
standpoint  of  the  social  philosopher. 

§  6.  Subdivisions  of  economics.  Economics  in  its  most 
general  sense  includes  various  subdivisions.  First  is  domestic 
economics  (household  economics),  the  modern  equivalent  of 
oiko-nomos,  first  used  by  Xenophon  as  the  name  for  a  set  of 
rules  to  help  the  housekeeper  or  steward  of  an  estate.  The 
typical  Greek  household,  however,  was  a  large  estate  with 
slaves,  almost  a  little  state  in  itself,  carrying  on  nearly  all  the 
arts  and  crafts.  The  term  political  economy  (as  economie 
politique)  was  first  used  in  France  in  the  eighteenth  century 
to  express  the  set  of  rules  or  principles  to  guide  the  king  and 
his  counselors  in  the  control  of  his  country,  which  was  thought 
of  much  as  if  it  were  the  king's  private  estate.  Of  late  the 
term  "economics,"  as  expressing  better  a  broadening  con- 
ception of  the  subject,  and  at  the  same  time  as  less  likely  to 
be  confused  with  politics,  has  been  gradually  displacing  the 
term  political  economy.    It  is  used  with  various  adjectives  in- 


8  ELEMENTS  OF  VALUE  AND  PRICE       [Pt.  I 

dicating  the  field  covered;  for  example,  domestic  economics, 
household  economics,  corporation  economics,  national  econom- 
ics, political  economy,  world-economy,  etc. 

§  7.  Economy  in  the  sense  of  the  subject  studied.  We 
have  chosen  for  our  purpose  to  define  economics  as  a  "  study, ' ' 
a  body  of  knowledge,  a  science.  But  as  in  the  case  of  various 
other  sciences,  its  name  is  used  also  to  indicate  the  body  of 
facts  and  group  of  persons  which  are  studied.  One  person 
(like  Robinson  Crusoe,  on  his  desert  island)  constitutes  an  in- 
dividual economy.  There  are,  in  such  a  case,  no  personal  rela- 
tions to  study,  but  only  the  relations  of  man  to  his  environ- 
ment. A  group  of  persons  thought  of  together  with  all  their 
material  environment  and  in  their  relations  with  each  other, 
forming  something  of  an  economic  unity,  constitute  a  social 
economy.  The  economic  affairs  of  a  family  constitute  a  family 
or  domestic  economy,  and  those  of  a  nation  a  political,  or  a 
national,  economy. 

§  8.  Economy  not  parsimony.  It  should  hardly  be  neces- 
sary to, warn  against  giving  to  the  word  "economy"  the  mean- 
ing of  (the  act  or  the  quality  of)  parsimony.  Economy  im- 
plies good  management,  making  the  best  of  whatever  means 
one  has,  and  this  is  not  stinginess,  tho  the  thriftless  and 
the  self-seeking  are  always  prone  to  impute  it  as  such  to 
others.  Economy  as  a  mode  of  action  is  parallel  to  economics 
as  the  science  that  seeks  to  arrive  at  such  general  rules  and 
principles  as  will  lead  to  the  best  results  in  the  use  of  the 
resources  and  services  of  individuals,  families,  and  nations. 

It  is  true  that  there  are  different  standards  by  which  to 
judge  what  is  "best";  sometimes  a  merely  pecuniary  stand- 
ard of  business  profit  to  the  individual  is  taken,  and  this 
may  come  close  to  mere  avarice.  Again,  a  standard  of  true 
welfare  for  the  nation  or  for  the  race  may  be  taken.  These 
two  views  may  be,  and  often  are,  in  conflict,  and  it  is  a  part  of 
the  task  in  this  study  to  keep  before  the  mind  as  clearly  as 
possible  the  difference  between  these  standards.  The  one 
standard  is  that  of  individual — pecuniary,  acquisitive  eco- 


Ch.  1]  PURPOSE  ANB  NATURE  OF  ECONOMICS  9 

nomies;  the  other  that  of  public — industrial,  productive  eco- 
nomics.^ 

§  9,  Social  aims  of  economics.  Economics  is  often  defined 
as  the  science  of  wealth.  Partly  because  of  this,  and  partly 
because  of  the  unfortunate  confusion  of  the  individual  and  of 
the  social  points  of  view,  it  has  been  characterized  as  a  "gospel 
of  Mammon."  But,  in  the  main,  economics  must  be  under- 
stood as  a  social  study  for  social  ends,  not  a  selfish  study  for 
individual  advantage.  The  individual  interest  must  be  recog- 
nized, but  treated  as  within,  and  subordinate  to,  the  larger 
social  interests.  Certainly  some  of  the  lessons  of  economies 
may  be  of  practical  value  to  men  in  active  business,  and 
training  in  economics  is  increasingly  deemed  a  helpful  prep- 
aration for  many  special  callings.  Many  economic  "princi- 
ples" are  but  the  general  statement  of  those  ideas  that  have 
been  approved  by  the  experience  of  business  men,  of  states- 
men, and  of  the  masses  of  men.  Economics  is  not  dreamed 
out  by  the  closet  philosopher,  but  more  and  more  it  is  the 
attempt  to  describe  and  comprehend  the  interests  and  the 
action  of  the  practical  world  in  which  men  must  live.  Many 
men  are  working  together  to  develop  this  study — ^those  who 
collect  statistics  and  facts  bearing  on  all  kinds  of  practical 
affairs,  and  those  who  search  through  the  records  of  the  past 
for  illustrations  of  experiments  and  experiences  that  may 
help  us  in  our  life  to-day. 

§  10.  Economics  in  a  democracy.  With  the  growth  of 
the  modern  state,  with  the  increasing  importance  of  business, 
and  of  industrial  and  commercial  interests,  as  compared  with 
changes  of  dynasty  or  the  personal  rivalries  of  rulers,  eco- 
nomic questions  have  grown  in  relative  importance.  In  our 
own  country,  particularly  since  the  subjects  of  slavery  and  of 
states'  rights  ceased  to  absorb  the  attention  of  our  people,  eco- 
nomic questions  have  pushed  rapidly  into  the  foreground.  In- 
deed, it  has  of  late  been  more  clearly  seen  that  many  of  the 
older  political  questions,  such  as  the  American  Revolution  and 

1  This  distinction  is  developed  in  Part  VI,  especially  in  ch.  39. 


10  ELEMENTS  OF  VALUE  AND  PRICE  [Pt.  I 

slavery,  formerly  discussed  almost  entirely  in  their  political 
and  constitutional  aspects,  were  at  bottom  largely  questions  of 
economic  rivalry  and  of  economic  welfare.  The  remarkable 
increase  in  the  attention  given  to  this  study  in  colleges  and 
universities  since  the  beginning  of  the  last  quarter  of  the  nine- 
teenth century  is  but  the  index  of  the  greatly  increased  in- 
terest and  attention  given  to  it  by  citizens  generally. 

The  conception  of  political  economy  as  the  term  was  first 
used,  has  been  modified  wherever  unlimited  monarchy  has 
given  way  to  the  rule  of  the  people.  In  a  democracy  there  is 
need  for  a  general  diffusion  of  knowledge,  if  the  economic 
policy  and  legislation  of  the  State  is  to  be  intelligent.  The 
power  now  rests  not  with  the  king  and  a  few  counselors,  but 
in  the  last  resort  with  the  people,  and  therefore  the  people 
must  be  acquainted  with  the  experiences  of  the  past,  must  so 
far  as  possible  have  economic  knowledge  to  enlighten  them  in 
their  choice  of  men  and  of  measures. 

Note 

Economic  laws  and  other  terms.  In  the  science  of  economics  some 
general  ideas  and  statements  are  attained,  and  are  called  variously  laws, 
principles,  theories,  hypotheses,  and  doctrines.  These  terms  are  used 
somewhat  loosely,  and  we  may  note  the  general  meaning  that  we  are 
to  attach  to  them. 

Law  originally  meant  (1)  the  binding  custom  or  practice  of  a  com- 
munity; then  came  to  mean  (2)  a  rule  laid  down  and  enforced  by  some 
authority,  as  the  State  (acting  through  the  political  law-making  body), 
or  as  divine  will ;  ( 3 )  a  statement  of  an  order  or  relation  of  phenomena 
which  appears  to  hold  imder  the  given  conditions.  Economic  laws  have 
this  last  meaning;  they  are  not  made  and  enforced  by  man,  but  are 
discovered  as  the  true  order  inherent  in  things.  Often  in  the  physical 
sciences  law  in  this  sense  suggests  a  pretty  definite  arithmetic  state- 
ment (i.e.,  Newton's  law  of  gravitation,  Kepler's  law,  etc.),  but  it 
is  used  generally  of  an  orderly  recurrence.  In  economics  the  term  is 
frequently  applied,  as  in  the  phrases,  law  of  diminishing  returns, 
Gresham's  law  of  money,  etc. 

Principle  meant  (1)  beginning;  then  (2)  source,  or  origin;  (3)  a 
fundamental  truth;  (4)  an  elementary  proposition.  Law  and  prin- 
ciple are  used  almost  interchangeably,  tho  it  would  seem  better  to 


Ch.  1]  PURPOSE  AND  NATURE  OF  ECONOMICS  11 

speak  of  principle  when  a  more  elementary  statement  ia  meant,  and 
a  law  when  the  statement  is  more  complex.  Throughout  this  book  the 
preference  is  generally  given  to  the  word  principle  rather  than  law  in 
cases  where  there  is  good  usage  favorable  to  both. 

Theory  meant  ( 1 )  contemplation ;  then  ( 2 )  the  general  explanation 
of  a  body  of  facts,  or  group  of  phenomena;  in  other  words,  a  plan  or 
scheme  of  thought  constructed  to  fit  the  facts  so  far  as  they  are 
known.  The  popular  use  of  the  term  theory  to  mean  some  plan  of 
action,  especially  a  poorly  thought  out  plan  sure  to  fail,  should  have  no 
place  in  our  discussion.  It  is  an  error  to  contrast  theory  and  practice 
as  the  impracticable  versus  the  practical.  They  should  be  contrasted 
only  as  idea,  or  explanation,  versus  action,  or  execution.  Good  theory 
then,  usually  goes  with  good  practice  and  bad  theory  with  poor  prac- 
tice. Usually  when  it  is  said  that  a  thing  is  true  in  theory  but  false  in 
practice,  what  is  meant  is  that  the  theory  is  untrue,  based  on  purely 
imaginary  conditions  and  hence  will  not  work.  Science  has  to  do  with 
theory;   art  has  to  do  with  practice. 

Hypothesis,  often  used  interchangeably  with  theory,  may  be  distin- 
guished from  it;  it  is  a  provisional  conjecture  regarding  the  relations 
of  certain  phenomena,  whereas  a  theory  is  a  hypothesis  which  has  under- 
gone a  large  measure  of  verification. 

Doctrine  meant  originally  (1)  that  which  is  taught,  usually  by  a 
group  of  thinkers;  hence  (2  a  body  of  principles.  In  such  expressions 
as  the  law  of  rent,  the  theory  of  rent,  and  the  doctrine  of  rent,  the 
terms  are  well  nigh  synonymous,  and  the  preference  for  the  use  of 
"doctrine"  in  certain  cases  rather  than  theory  or  principle,  resulted 
more  or  less  from  the  historical  accident  that  a  theory  became  connected 
in  thought  with  a  group  of  thinkers  (that  is,  was  taught  by  them,  as 
Malthusian  doctrine,  the  Ricardian  rent  doctrine,  the  free-trade  doctrine 
of  the  Manchester  School,  etc.). 


CHAPTER  2 
CHOICE  AND  VALUE 

§1.  Choice;  its  origin.  §2.  Development  of  conscious  choice.  §3. 
The  idea  of  scarcity.  §  4.  Valuation.  §  5.  One's  own  labor  as  a  valu- 
ation unit.  §  6.  Crusoe's  scale  of  valuations.  §  7.  Choice  before  and 
after  valuation.  §  8.  Value.  Notes  on  Aspects  of  things  chosen,  Vari- 
ous meanings  of  scarcity,  Value  and  valuations. 

§1.  Choice;  its  origin.  The  world  of  industry,  as  we 
look  out  upon  it,  appears  to  be  alive  with  motion,  like  a  bee- 
hive. In  the  crowded  harbor,  the  busy  railroad  yard,  the 
noii^  steel  mill,  the  bustling  department  store,  we  see  a  cease- 
less and  bewildering  activity.  In  all  this  movement  and  ap- 
parent confusion,  there  is,  however,  a  large  degree  of  order 
and  a  pretty  regular  succession  of  events  which  reflects  a  suc- 
cession of  choices  that  men  are  making. 

These  choices  are  not  always  and  entirely  the  result  of  de- 
liberate and  conscious  calculation.  They  are  determined  in  a 
very  great  degree  by  habit  or  by  instinct.  Every  living  crea- 
ture has  a  nervous  organization  of  some  sort — plants  as  well 
as  the  lowest  forms  of  animals.  This  nervous  organization  has 
a  pretty  definite  "set"  or  habit  of  response  toward  its  en- 
vironment; that  is,  the  nerves  react  in  certain  ways  to  ex- 
ternal stimuli.  The  seed  in  moist  soil  germinates;  it  sends 
rootlets  into  the  earth  in  search  of  water  and  of  the  particu- 
lar soil-elements  which  it  by  nature  "chooses";  it  sends 
stock  and  leaf  upward  into  the  light  and  air,  it  spreads  or 
climbs  or  twines  according  to  its  nature.  The  chick  picks  its 
way  out  of  the  shell,  and  then  instinctively  (hy  its  inborn 
nature)  picks  at  any  particle  it  sees.  It  finds  some  objects 
"good"  and  it  eats  them;  it  finds  others  "bad"  and  it  rejects 

12 


Ch.  2]  CHOICE  AND  VALUE  IS 

them.  It  thus  adds  to  its  instinctive  choice  the  choice  result- 
ing from  experience. 

§  2.  Development  of  conscious  choice.  Every  human  be- 
ing starts  on  his  life  of  choice  in  just  this  way,  with  a  fund 
of  natural  impulses,  a  capacity  for  certain  instinctive  reac- 
tions. The  new-born  child  cries  when  hungry  or  uncomfort- 
able, and  it  does  not  know  in  advance  (the  first  time)  what 
it  is  crying  for.  It  is  moved  by  mere  impulse,  tho  we  say 
loosely  that  it  "knows"  well  enough  when  it  gets  the  right 
thing.  Some  food  it  rejects,  other  food  it  takes ;  and  its  mere 
impulse  has  now  become  a  vague  aversion  or  a  vague  desire. 
Very  quickly  it  learns  to  associate  the  presence  of  some  ob- 
ject with  this  or  with  that  choice,  and  reaches  for  it,  cries  for 
it,  giving  now  a  very  definite  direction  to  the  impulse  which  it 
feels.  Feeling  directed  in  this  way  upon  some  particular  ob- 
ject or  action  is  called  desire.  If  we  speak  of  this  as  a  "con- 
scious desire,"  we  mean  not  that  the  person  is  reflecting  on 
the  nature  of  the  desire,  but  simply  that  he  is  conscious  of 
the  presence  of  the  thing,  and  that  he  desires  it.  As  the  child 
grows  older,  choice  becomes  vastly  more  complex,  but  all  hu- 
man choice  is  the  development  of  the  first  simple  impulsive 
acts.  The  difference  in  this  matter  between  man  and  the  ani- 
mals lies  in  the  degree  to  which  the  original  fund  of  impulses  is 
strengthened  or  weakened  by  experience  and  training,  and  is 
modified  by  the  greater  growth  of  forethought,  imagination, 
and  reason.  As  the  man  attains  his  maturity,  deliberate  cal- 
culation enters  more  and  more  into  the  making  of  choice.  Yet 
the  instinctive  and  habitual  elements  of  choice  continue  to  be 
very  potent. 

Tastes  change  with  age,  are  trained,  are  influenced  by  cus- 
tom, by  example,  and  by  suggestions  of  many  kinds,  and  are 
given  a  wider  range  by  wealth,  travel,  and  opportunity.  But 
choice  is  ruled  fundamentally  by  impulse  and  by  instinct ;  one 
likes  what  he  likes ;  de  gustibus  non  disputandum  est. 

Choice  develops  in  this  way  as  it  is  directed  upon  each  of 
the  great  classes  of  things  with  which  man  is  surrounded; 


14  ELEMENTS  OF  VALUE  AND  PRICE  [Pt.  I 

clothing,  houses,  furniture,  horses,  automobiles,  books,  etc.  It 
operates  also  upon  the  actions  of  the  man  himself.  He  reaches 
out  or  withdraws  his  hand ;  he  seeks  or  he  shuns ;  he  labors  to 
make  or  to  destroy,  to  possess  or  to  get  rid  of.  Thus  the 
choice  among  one's  own  acts  is  intertwined  with  one's  choice 
of  things.^ 

§  3.  The  idea  of  scarcity.  Now  we  are  not  likely  to  feel 
a  very  keen  desire  for  a  particular  thing  unless  the  supply  of 
it  at  our  disposal  is  relatively  limited.  The  air  which  we 
breathe  is  essential  to  life.  But  the  air  is  all  around  us,  and 
ordinarily  in  boundless  abundance.  Moreover,  we  breathe  by 
reflex  or  automatic  action  of  the  muscles  without  conscious 
attention.  The  result  is  that  we  do  not  ordinarily  feel  a  de- 
sire for  air.  But  in  a  crowded  room  where  there  is  a  real 
scarcity  of  fresh  air  relative  to  our  need  for  it,  our  desire  for 
a  breath  of  fresh  air  may  become  very  keen  indeed.  Under 
such  circumstances  the  air  takes  on  a  very  different  impor- 
tance as  an  object  of  choice.  Our  impulsive  actions  and  our 
thought  are  directed  toward  getting  it.  The  diver  in  his  div- 
ing suit  must  make  this  his  first  and  most  constant  interest; 
the  drowning  man  tragically  feels  this  need. 

The  scarcity  which  we  are  now  discussing  is  such  a  limita- 
tion in  the  number  or  quantity  of  objects  that  not  all  desires 
can  be  met  then  and  there  by  the  amount  of  goods  available. 
In  the  numberless  cases  where  some  desires  are  not  met  or 
are  only  partially  met,  we  are  under  the  necessity  of  mak- 
ing a  choice  as  to  which  desires  shall  be  met.  This  involves 
a  choice — and  therefore  a  comparison — among  things.^ 

§  4.  Valuation.  If  we  choose  one  thing  rather  than  an- 
other it  is  plain  that  for  us  the  first  thing  has  the  greater 
importance.  For  one  cause  or  another  (instinct,  training,  ex- 
perience, imagination,  judgment)  it  weighs  more  in  the  scale 
of  our  choice  than  the  thing  which  is  rejected.  Now  in  our 
daily  life  we  are  constantly  making  comparisons  of  this  sort 

1  See  note  on  Aspects  of  things  chosen,  at  end  of  chapter. 

2  See  note  at  end  of  chapter  on  Various  meanings  of  scarcity. 


CH.2] 


CHOICE  AND  VALUE 


16 


o... 

S/v. 

-- 

..b 

1.  Ghoick  Bb- 
TWEEN  Two  Ob- 
jects.* 


between  things.    Few  of  us — if  any — are  able  to  secure  all 

the  things  which  we  desire.    We  are  under  the  necessity  of 

choosing  among  the  various  possibilities.    We  are,  therefore, 

under  the  recurring  necessity  of  comparing 

one  thing  with  another,  and  in  so  doing, 

we  assess  or  estimate  one  thing  in  terms  of 

the  quantity  of  the  other  thing.     Such  an 

expression  of  the  importance  of  one  object 

of  choice  in  terms  of  another  we  may  call  a 

valuation. 

A  comparison  of  this  sort  between  things  ^^ 
may  take  the  form  of  a  mere  vague  prefer- 
ence without  any  exact  quantitative  expression  of  the  degree 
to  which  the  one  thing  is  more  important  to  us  than  the  other. 
(Fig.  1.)  We  prefer  one  object,  X,  to  another  object,  Y,  with- 
out attempting  to  express  even  to  ourselves  the  exact  strength 
of  the  preference.  On  the  other  hand,  our  valuations  may 
and  usually  do  take  the  form  of  definite  mathematical  ratios. 
In  the  early  American  fur  trade,  for  example,  a  beaver  skin 
came  by  convention  to  be  used  as  a  unit  in  terms  of  which  the 
relative  importance  of  other  things  (e.g.,  other  furs,  food  sup- 
plies, etc.)  was  expressed.  The  other  things  were  measured 
as  multiples  (or  fractions)  of  the  unit. 
Suppose,  now,  that  in  a  similar  way,  we  were  to  take  a  num- 
ber of  things,  X,  Y,  M,  N,  0,  P,  and 
Q  (taking,  of  course,  a  definite 
amount  and  grade  of  each)  and  were 
to  make  an  exact  estimate  of  their 
respective  degrees  of  importance. 
The  accompanying  diagram  may  be 
used  to  express  in  a  graphic  way  the 
Fio.  2.  oedeb  ot  Choicb  mathematical  relations  of  the  impor- 
AMONQ  seveeal  Objects,     ^^^^^q  of  ^ny  one  expressed  in  terms 

•  The  dotted  valuation  line  ab  drawn  through  x  and  above  y  indicates 
that  the  valuation  of  x  is  greater  than  that  of  y,  but  the  degree  of  the 
difference  is  left  indefinite. 


w.     b 


16  ELEMENTS  OF  VALUE  AND  PRICE  [Pt.  I 

of  any  one  of  the  others.  As  a  matter  of  convenience  we  may 
settle  upon  a  particular  one,  Q,  as  a  common  unit  for  express- 
ing or  measuring  the  importance  of  each  of  the  others  in 
turn.  This,  in  fact,  is  exactly  what  the  fur-traders  did.  And 
we  do  the  same  in  our  use  of  a  monetary  unit  as  our  standard 
for  the  expression  and  comparison  of  the  relative  importance 
of  things. 

Viewed  as  the  reflection  of  an  act  of  choice,  a  valuation  of 
goods  appears  to  be  a  very  simple  fact.  Yet  underlying  this 
simplicity  would  be  found  ordinarily  a  number  of  complex 
motives.  Each  valuation  is  a  focus  of  many  influences,  a  re- 
sultant of  many  conditions,  some  in  the  environment,  and 
some  in  the  nature  and  in  the  feeling  of  man.  According  as 
there  is  more  or  less  of  the  various  things  to  choose,  and  ac- 
cording as  the  person  is  more  or  less  hungry  or  tired  or  cold 
or  elated  or  downcast,  any  particular  object  may  appear  to 
be  more  or  less  important,  may  thus  have  a  greater  or  less 
valuation. 

§  5.  One's  own  labor  as  a  valuation  unit.  A  valuation 
involves  more  than  a  comparison  between  external  objects. 
Often  one's  own  labor  is  brought  into  the  comparison. 
Choice  frequently  has  to  be  made  with  reference  to  the  lim- 
ited strength  and  time  of  the  subject,  his  laboring  force.  Here 
there  is  a  twofold  comparison;  a  good  is  compared  with  the 
labor  required  to  secure  it  as  well  as  with  another  good.  When 
we  are  face  to  face  with  nature,  and  goods  are  to  be  secured 
only  through  our  own  labor  applied  to  various  materials,  we 
are  likely  to  estimate  things  habitually  in  terms  of  our  own 
labor.  Labor  may  under  these  circumstances  become  a  com- 
mon unit  for  the  valuation  of  external  things. 

§6.  Crusoe's  scale  of  valuations.  The  economy  of  Rob- 
inson Crusoe  serves  to  illustrate  the  problems  which  the  indi- 
vidual has  to  solve  when  the  relation  is  between  man  and  na- 
ture, and  not  between  man  and  man. 

The  unfailing  interest  which  old  and  young  find  in  the 
story  of  Crusoe  is  largely  due  to  the  convincing  naturalness 


Ch.2]  choice  and  value  17 

of  the  tale.  Each  reader  feels  that  he  would  have  done  just 
the  same  things  in  just  the  same  order,  if  he  were  in  the  same 
plight  and  had  been  cast  ashore  as  the  story  relates. 

I  was  wet  and  cold,  and  had  no  dry  clothes  to  put  on,  no  food 
to  eat,  not  a  friend  to  help  me.  ...  I  had  but  a  knife  and  a  pipe.  .  .  . 
Where  was  I  to  go  for  the  night?  ...  I  went  to  a  tree  and  made  a 
kind  of  nest  to  sleep  in.  Then  I  cut  a  stick  to  keep  off  the  beasts  of 
prey  in  case  they  should  come.  .  .  .  The  next  day  ...  I  swam  up  to 
the  wreck  which  was  in  a  sand  bank.  My  first  thought  was  to  look 
around  for  some  food  .  .  .  and  I  ate  some  of  it  as  I  went  to  and  fro, 
as  there  was  no  time  to  lose.  There  was,  too,  some  riun,  of  which  I  took 
a  good  draught,  and  this  gave  me  heart.  ...  I  fell  to  work  to  make 
a  raft.  I  foimd  some  bread  and  rice,  a  Dutch  cheese,  and  some  dried 
goat's  flesh,  .  .  .  some  fresh  clothes  and  four  guns,  .  .  .  with  these  I 
put  to  sea  .  .  .  and  brought  the  raft  safe  to  land  with  all  her 
freight.  .  .  . 

The  next  day,  as  there  was  still  a  great  store  of  things  left  in  the 
ship,  which  would  be  of  use  to  me,  I  thought  I  ought  to  bring  them 
to  land  at  once,  for  I  knew  that  the  first  storm  would  break  up  the 
ship.  .  .  .  The  first  thing  I  sought  was  the  tool-chest;  and  in  it  were 
some  bags  of  nails,  spikes,  saws,  knives,  and  such  things;  but  best 
of  all  I  found  a  stone  to  grind  my  tools  on.  There  were  two  or  three 
flasks,  some  large  bags  of  shot,  and  a  roll  of  lead.  There  were  some 
spare  sails  too,  which  I  brought  to  the  shore. 

Now  that  I  had  two  freight  of  goods  on  hand,  I  made  a  tent  with 
the  ship's  sails,  to  stow  them  in,  and  cut  the  poles  for  it  from  the 
wood. 

The  next  day  I  had  no  great  wish  for  work,  but  there  was  too  much 
to  be  done  for  me  to  dwell  long  on  my  sad  lot.  Each  day,  as  it  came, 
I  went  off  to  the  wreck  to  fetch  more  things  and  I  brought  back  as 
much  as  the  raft  would  hold.  .  .  . 

The  last  time  I  swam  to  the  wreck  I  found  some  tea  and  some  gold 
coin ;  but  as  to  the  gold  it  made  me  laugh  to  look  at  it.  "  O  drug," 
said  I ;  "  thou  art  no  use  to  me !  I  care  not  to  save  thee.  Stay  where 
thou  art  till  the  ship  goes  down ;  then  go  thou  with  it."  Still  I  thought 
I  might  as  well  just  take  it.  .  .  . 

I  have  said  not  a  word  of  my  pets.  You  may  guess  how  fond  I 
was  of  them,  as  they  were  all  the  friends  left  to  me.  I  brought  a  dog 
and  two  cats  from  the  ship. —  (Adapted  from  the  abridged  edition, 
published  by  H.   Altemus,   Philadelphia.) 

Crusoe  knew  not  at  what  moment  the  waves  would  sweep 


18  ELEMENTS  OF  VALUE  AND  PRICE  [Pt-  I 

into  the  sea  whatever  was  left.  He  had  scant  strength  and 
time  for  the  task.  His  labor  was  to  be  so  distributed  that  he 
might  save  from  the  wrecked  ship  the  most  valuable  contents. 
Did  he  choose  well?  First,  to  preserve  his  life  he  found  a 
tree  to  sleep  in,  and  a  stick  to  ward  off  wild  beasts.  Then 
at  the  ship  he  took  food,  clothing,  weapons  and  tools,  and 
made  a  place  to  store  them  safe;  and  finally  came  gold  and 
pets.  We  see  how  he  ranks  them  then  and  there,  and  how 
different  is  the  scale  from  that  he.  had  before.  His  re- 
mark about  the  gold  is  whimsically  suggestive  of  the  old  lin- 
gering standards  of  choice,  and  of  the  dim  hope  that  he  might 
return  to  live  among  men,  and  thus  resume  his  old  scale  of 
values. 

§  7.  Choice  before  and  after  valuation.  It  is  usual  to 
speak  of  the  valuation  which  a  person  has  (or  holds  or  makes) 
of  an  object  as  preceding  choice;  but  evidently  this  is  not  so 
in  the  case  of  instinctive  choice,  and  many  choices  have  in  a 
measure  this  impulsive  character.  In  ease  of  a  choice  of  a 
thing  by  a  person  for  his  own  use  the  valuation  is  simply  the 
resultant  of  choice ;  it  is  the  arithmetic  expression  necessarily 
involved  in  the  action  and  reveals  to  the  person  himself  what 
he  has  done,  how  he  values  the  object,  rather  than  determines 
his  action. 

In  a  great  many  business  transactions,  however,  one  is  not 
choosing  for  his  own  desires,  but  is  trying  to  forecast  the 
valuations  of  others  to  whom  he  will  sell.  There  is  often,  in 
such  cases,  a  long  and  careful  attempt  to  express  in  exact  fig- 
ures the  relative  importance  of  different  objects  before  a 
choice  is  finally  made.  In  other  cases  the  valuations  precede 
the  choice,  when  a  conscious  calculation  is  made  of  the  relative 
effectiveness  of  things  (heating  power,  food-value,  etc.)  and 
the  relative  difficulty  of  getting  them  (cost  in  money,  distance 
to  carry,  etc.).  In  this  sense  of  a  careful  estimate  of  the  im- 
portance of  a  thing  for  business  purposes,  we  speak  of  an  as- 
sessor's valuation  of  property  for  purposes  of  taxation,  an 
appraiser's  valuation  of  imports,  and  a  merchant's  valuation 


Ch.  2]  CHOICE  AND  VALUE  19 

of  his  stock-in-trade.    This  kind  of  commercial  valuation  usu  ■ 
ally  precedes  choice  by  merchants.' 

§  8.  Value.  Now  as  a  choice  is  made  and  a  valuation  is 
thus  expressed,  the  person  choosing  feels  that  there  is  a  certain 
quality  in  the  thing  which  evokes  or  determines  his  choice. 
This  quality  of  importance  which  things  have  when  they  are 
the  objects  of  man's  choice  is  value.  Broadly  understood 
value  may  be  of  many  kinds:  moral  (the  quality  in  actions 
calling  for  approval  or  disapproval) ,  religious  (the  quality  in 
actions,  sentiments,  and  beliefs  reflecting  what  the  persons  be- 
lieve to  be  the  will  of  the  deity),  esthetic  (the  quality  in  ob- 
jects that  accords  with  the  canons  of  good  taste  in  color,  form, 
sound,  etc.).  Economic  value  is  but  one  species  of  the  larger 
genus  of  value.  It  is  the  quality  in  an  object  in  the  environ- 
ment to  influence  a  man's  action  in  respect  to  the  control  and 
use  of  the  object.  We  ascribe  this  quality  to  the  object  that 
motivates  our  choice.  Bread,  meat,  dress,  houses,  land,  gold, 
carriages,  slaves,  the  labor  of  hired  servants,  each  object  is  said 
by  you  to  have  (economic)  value,  just  because  you  feel  and 
know  that  it  sways  your  behavior  in  relation  to  itself.  Value 
in  this  sense  is  not  inherent  or  intrinsic  in  anything ;  it  goes 
and  comes,  it  grows  and  wanes,  according  to  the  intensity  of 
the  desire.  It  may  have  existence  for  one  economic  subject 
and  not  for  another.  It  is  not  to  be  thought  of  as  something 
in  a  thing  before  man  makes  it  an  object  of  choice.  The  log- 
ical order  is :  first,  choice ;  secondly,  a  valuation  by  necessary 
implication;  third,  value — ^the  quality  imputed  to  the  object. 
Yet  in  real  life  these  are  but  three  phases,  absolutely  contem- 
poraneous, of  the  same  thing.  Value  is  but  the  abstract  qual- 
ity which  we  attach  to  the  thing  in  our  thought,  because  of 
the  way  it  makes  us  behave  in  its  presence.  Value  is  funda- 
mentally a  reflection  of  the  individual  choice,  though  many 
individuals  may  have  a  similar  choice,  and  by  their  interrela- 
tions mutually  influence  each  other's  valuations  in  remark- 

3  It  is,  however,  but  the  anticipation  and  reflection  of  the  choices 
that  purchasers  will  later  make.    See  on  enterprise  in  Part  V. 


20  ELEMENTS  OF  VALUE  AND  PRICE  [Pt.  I 

able  ways.  Objects  have  their  physical  qualities  independent 
of  man's  choice;  the  apple  has  form,  weight,  the  texture  and 
skin  which  to  the  eye  look  red,  and  the  chemical  elements  that 
give  a  certain  flavor  and  taste.  These  singly  or  combined  are 
not  value,  tho  each  has  its  part  in  determining  under  vary- 
ing conditions,  whether  the  apple  is  to  have  also  the  quality 
of  value.  There  are  as  many  problems  of  economic  value  as 
there  are  ways  of  choosing  between  economic  objects.  Their 
study  makes  up  a  large  part  of  economics.* 

Notes 

Aspects  of  thingni  chosen.  Choice  itself  has  a  number  of  aspects  and 
is  made  in  reference  to  one  or  another  quality  of  goods  and  acts  (when 
certain  other  qualities  are  for  the  time  equal  or  may  be  left  out  of 
consideration).  The  four  chief  aspects  of  choice  relate  to  stuff,  form, 
place,  and  time,  as  follows:  (1)  Choice  of  kinds  of  things  (the  sim- 
plest case  being  choice  among  things  present  and  chosen  for  their 
immediate  use  and  enjoyment),  as  choice  between  different  kinds 
of  objects,  such  as  food  and  clothing,  apples  and  oranges;  or  again 
the  things  may  be  of  the  same  general  kind  but  of  different  qualities, 
as  apples  differing  in  sweetness,  smoothness,  and  in  color ;  or  the  objects 
may  be  of  different  sizes  or  be  in  different  quantities.  (2)  Choice  of 
form,  as  an  apple  cut  and  pared  rather  than  one  imcut,  or  cooked  food 
rather  than  uncooked  food,  or  a  made  garment  rather  than  the  unmade 
cloth  and  materials.  (3)  Choice  of  the  place,  as  an  apple  here  rather 
than  on  the  tree  or  on  a  distant  farm,  a  pail  of  water  in  the  house 
rather  than  at  the  well,  home  for  one's  self  rather  than  the  roadside 
at  dusk  with  home  still  miles  away,  etc.  (4)  Choice  of  the  time  at 
which  goods  of  a  certain  kind  shall  come  into  one's  control,  or  that 
acts  should  be  done,  as  choice  of  food  at  once  when  hungry  rather  than 
later,  or  of  rainfall  after  a  drought  rather  than  during  a  flood,  or 
the  choice  involved  in  keeping  of  food  for  winter  instead  of  eating  it 
all  in  the  fall,  etc. 

These  choices  occur  in  many  combinations  and  degrees  of  diflBculty 
and  complexity.  It  is  a  large  part  of  the  task  of  economics  to  study 
in  detail  the  large  groups  of  choices  which  are  thus  made. 

Yarlons  meanings  of  scarcity.  In  economics  the  idea  of  scarcity  is 
(as  is  shown  above)  connected  with  limitation  relative  to  the  desire  for 
the  objects.    But  "scarce"  has  other  meanings.     Sometimes  it  is  that 

*See  note  below  on  Value  and  valuation. 


Ch.  2]  CHOICE  AND  VALUE  21 

of  rare,  or  uncommon  (which  usually,  the  not  always,  implies  desirabil- 
ity), as  a  scarce  plant,  a  scarce  butterfly,  or  a  scarce  stamp.  Scarcity 
means  also  a  small  amoimt  compared  with  the  average  or  usual;  it  is 
said  that  wheat  is  scarce  the  year  of  a  poor  harvest  tho  there  are 
millions  of  bushels  of  it,  and  conversely  that  "wheat  is  not  scarce," 
when  there  is  a  good  harvest;  yet  in  relation  to  choice  it  is  merely 
less  scarce  than  usual. 

Value  and  valuation.  The  words  value  and  valuation  are  frequently 
used  interchangeably  without  much  harm;  yet  for  great  precision  it 
would  usually  be  better  to  distinguish  between  them.  The  essential 
meaning  of  value  as  given  in  §8  (a  quality  imputed  to  an  object  by 
a  man)  is  individual,  that  is,  it  relates  to  a  particular  person.  The 
meaning  is  somewhat  different  when  value  and  market  value  are  used 
for  convenience  to  express  a  valuation,  that  is,  some  one's  estimate  (as 
a  statistician's,  an  official's)  of  the  amount  of  goods  in  terms  of  price, 
such  as  the  value  of  the  imports  and  of  the  exports,  the  total  value  of 
the  wheat  crop  of  the  country,  the  value  of  all  the  outstanding  stock  of 
a  corporation.  This  valuation  is  obtained  by  multiplying  the  whole 
number  of  units  of  goods,  shares  of  stock,  etc.,  by  the  price  in  a  single 
transaction.  This  valuation  is  not  to  be  confused  with  price;  price  is 
an  actual  amount  of  money  paid,  whereas  the  valuation  is  an  estimate 
of  the  total  number  of  dollars  for  which  all  the  articles  could  have  sold, 
if  they  had  changed  hands  at  that  price.  In  fact,  in  many  cases,  many 
of  them  did  not  change  hands  at  that  time. 


i 


CHAPTER  3 
GOODS  AND  PSYCHIC  INCOME 

{  1.  Inherent  physical  nature  of  things.  §  2.  Free  goods  and  economic 
goods.  §  3.  Harmful  objects.  §  4.  Value  and  true  welfare.  §  5.  Gratifi- 
cation of  desire.  §  6.  The  idea  of  income.  §  7.  Psychic  income.  §  8. 
Motivating  force  of  psychic  income.  §  9.  The  personal  equation  in 
psychic  income.  §  10.  Desire  streams  and  income  streams.  §  11.  Goods 
of  direct  use.     §  12.  Directness  of  use  defined. 

§  1.  Inherent  physical  nature  of  things.  Man  has  to  take 
the  physical  nature  of  things  as  he  finds  it.  He  can,  to  be 
sure,  make  certain  changes  in  the  relative  positions  of  parti- 
cles or  masses  of  matter.  He  can  decompose  a  chemical  com- 
pound into  its  elements;  he  can  change  iron  into  steel,  and 
with  this  construct  elaborate  machinery ;  he  can  make  clothing 
of  vegetable  fiber ;  he  can  cut  a  canal  through  an  isthmus  that 
united  two  continents.  He  can,  in  short,  make  many  changes  in 
his  physical  environment  and,  within  limits,  he  can  adjust  it 
to  his  liking.  But  the  physical  and  chemical  forces  of  the 
world,  acting  in  ways  which  we  express  as  natural  laws,  are 
beyond  the  power  of  man  to  change.  He  may  rise  above  the 
earth  in  a  balloon,  or  even  travel  through  the  air  in  a  heavier- 
than-air  machine.  But  the  force  of  gravitation  is  acting  upon 
him  during  every  moment  of  his  flight.  Material  things  differ 
in  their  specific  gravity,  in  their  power  to  reflect  rays  of  light, 
or  to  absorb  or  transmit  heat.  They  differ  also  in  their  chem- 
ical qualities.  Niter,  charcoal,  and  saltpeter,  combined  in  cer- 
tain proportions,  form  an  explosive.  Other  proportions  give 
other  results.  Solids  combiae  to  form  gases  and  liquids  unite 
to  form  solids,  and  these  qualities  and  reactions  of  material 
things  are  for  men  ultimate  truths  of  chemistry.     Sunshine 

22 


Ch.  3]  GOODS  AND  PSYCHIC  INCOME  23 

acts  on  living  bodies,  whether  plant,  animal,  or  man,  in  certain 
ways.  Some  plants  are  nourishing  food  for  animals,  others 
are  poisonous.  If  man  were  not  living  on  the  earth,  things 
would,  so  far  as  we  can  conclude,  have  the  same  physical  and 
chemical  qualities,  and  mechanical  laws  would  be  the  same  as 
at  present.  They  are  not  governed  by  the  will  of  man.  Man 
can,  however — and  does — slowly  learn  the  nature  of  things, 
and  as  he  does  so  he  makes  choices  among  them,  uses  them 
for  his  purposes,  combines,  separates,  and  adapts  them  so  that 
he  may  better  bring  about  the  results  he  desires.  The  fitness 
of  things  for  accomplishing  man's  desires  is  what  makes  them 
objects  of  choice. 

§  2.  Free  goods  and  economic  goods.  We  have  already 
seen  that  some  things,  even  such  as  are  indispensable  to  exist- 
.ence,  may  yet,  because  of  their  abundance,  fail  to  be  objects 
of  desire  and  of  choice.  Such  things  are  called  free  goods. 
They  have  no  value  in  the  sense  in  which  the  economist  uses 
that  term.  Free  goods  are  things  which  exist  in  superfluity ; 
that  is,  in  quantities  sufficient  not  only  to  gratify  but  also  to 
satisfy  all  the  desires  which  may  depend  upon  them.  The  air 
about  us  is  ordinarily  a  good  of  this  kind.  Water,  too,  tho 
in  certain  places  and  at  certain  times  where  it  is  scarce  it  takes 
on  a  value,  is  in  many  places  so  abundant  that  it  falls  in  the 
category  of  free  goods.  The  same  is  true  at  certain  times  and 
places  of  firewood,  fruits,  and  other  things,  when  there  chances 
to  be  a  surplus,  relative  to  the  desires  of  men.  In  such  cases 
both  the  portions  which  are  used  and  the  other  portions  are 
without  value — are  free  goods. 

There  is  always  something  puzzling  about  this  as  one  begins 
to  think  about  it.  It  seems  unreasonable  to  say  that  diamonds, 
laces,  cigarettes,  have  value,  and  air  and  water  have  not.  But 
the  explanation  is  simple.  Tho  we  must  have  air  to  live, 
and  tho  every  breath  we  draw  is  to  supply  this  need,  our 
attention  need  not  ordinarily  be  given  to  the  matter  of  the 
supply  of  air  at  all.  So  long  as  it  is  present  in  abundance, 
the  desire  for  it  has  no  chance  to  rise  to  noticeable  intensity, 


"24  ELEMENTS  OF  VALUE  AND  PRICE        [Pt.  I 

and  remains  constantly  at  the  zero  point.  Men  do  not  con- 
cern themselves  about  that  which  they  have  in  superfluity — 
unless  indeed  the  excess  causes  them  some  discomfort.  It  is 
well  that  they  do  not,  for  a  wise  direction  of  effort  can  take 
place  only  when  men  think  mainly  of  the  things  that  are  lack- 
ing and  direct  their  efforts  toward  securing  them. 

Most  kinds  of  enjoyable  things  are  constantly  being  used  up 
before  every  use  dependent  on  them  can  be  made.  Our  stocks 
of  such  things  become  therefore  the  objects  of  our  choice.  We 
strive  to  use  them  with  some  care  and  attention.  Such  goods 
are  called  economic  goods,  being  the  goods  which  have  value 
and  therefore  must  be  economized.  As  we  have  already  seen, 
a  certain  thing  may  be  a  free  good  at  one  time  because  of  its 
abundance  and  at  another  time  it  may  be  an  economic  good 
because  of  its  scarcity. 

§  3.  Harmful  objects.  Beyond  the  boundary  of  economic 
goods  and  of  free  goods  there  lies  an  anti-economic  environ- 
ment, the  harmful :  destructive  lightning,  floods,  poisons,  ver- 
min, pests  of  locusts,  disease-breeding  swamps,  wild  beasts, 
human  enemies,  and  many  other  ills  of  earth.  While  some 
water  continues  to  be  "a  good,"  other  water  may  be  "an  ill," 
flooding  one 's  cellar,  or  soaking  one 's  clothes  on  a  cold  day,  or 
breaking  through  the  walls  of  a  mountain  reservoir  and  carry- 
ing death  and  destruction  in  its  path.  Pure  air  may  come  as 
a  tornado,  fire  may  destroy  our  dwelling,  growing  woods  may 
cover  the  fields  needed  for  tillage,  iron  may  crush  the  foot  or 
cut  the  hand.  And  so,  anything  may  become  harmful,  while 
in  turn  the  "harmful"  may  become  useful.  Poison  helps  rid 
the  house  of  vermin,  disease  germs  may  be  made  to  serve  as 
antitoxins,  noxious  weeds  may,  by  the  discovery  of  some  new 
process,  be  worked  '  into  useful  forms,  tho  they  may  still 
continue  to  be  harmful  in  many  a  farmer's  field. 

§  4.  Value  and  true  welfare.  It  will  be  noticed  that  the 
things  that  are  valued,  the  things  that  we  call  economic  goods, 
are  things  that  have  a  relation  to  the  choices  or  desires  of 
men.    It  must  not  be  thought,  however,  that  they  are  of 


Ch.  3]  GOODS  AND  PSYCHIC  INCOME  25 

necessity  conducive  to  real  welfare,  either  generally  or  per- 
manently, as  the  term  "good""  might  seem  to  imply.  In  many 
cases  they  may  be  so,  but  what  shall  we  say  of  the  pistol  which 
the  highwayman  points  at  his  victim,  or  of  the  poison  with 
which  the  lunatic  kills  his  friend,  or  of  the  opium  for  which 
the  miserable  victim  would  give  his  birthright,  or  of  the  whisky 
which  is  ruining  the  happiness  of  the  drinker  and  of  his  fam- 
ily? For  the  individual  these  things,  being  the  objects  of 
choice  and  desire,  have  value,  and  the  term  "economic  goods" 
has  been  extended  to  cover  things  of  this  sort.  The  econo- 
mist, however,  must  not  overlook  the  injurious  results  of  such 
uses,  and  in  his  final  judgments  on  economic  welfare  must  en- 
deavor to  see  a  larger  good  than  that  of  the  moment  and  of  the 
individual  desire. 

The  term  utility  properly  expresses  the  idea  of  this  fitness 
(a  quality)  of  things  to  conduce  to  real  welfare  quite  apart 
from  the  subject's  knowledge  at  the  time  of  his  choice. 
This  is  in  accord  with  usage  as  well  in  biology  (for  example, 
in  discussing  the  utility  of  certain  organs)  as  in  the  moral 
sciences  (for  example,  in  studying  the  utility  of  certain  in- 
stitutions). We  should  beware  of  the  very  frequent  confu- 
sion of  the  terms  value  and  utility,  and  throughout  we  shall 
connect  the  idea  of  value  with  choice  and  not  with  utility. 
Later,  in  considering  the  more  lasting  effects  that  wealth  has, 
either  upon  the  individual  or  upon  society,  utility  has  its 
place. 

§  5.  Gratification  of  desire.  We  have  already  seen  that 
there  is  in  our  desires  for  things  an  impulsive  or  an  instinctive 
element.  But  with  our  growth  through  childhood  into  ma- 
turity, experience  accumulates,  and  our  choices  among  things 
and  our  desires  for  things  come  to  have  in  them  elements  of 
memory,  calculation,  imagination,  and  reason.  We  desire  an 
article  of  food  partially  because  we  have  already  tasted  it  and 
imagination  recalls  the  sensation  which  it  gave  us.  We  desire 
a  plow  because  our  reasoning  powers  tell  us  that  the  plow  will 
assist  us  in  growing  the  crop  which  is  to  serve  as  food.    So  as 


26  ELEMENTS  OF  VALUE  AND  PRICE       [Pt.  I 

we  develop  intelleetually  it  comes  about  that  judgment  domi- 
nates our  desires  to  a  very  considerable  degree.  Now  if  we 
have  a  desire  for  a  thing,  and  succeed  in  securing  it,  a  change 
takes  place  in  our  desire.  This  change  we  call  gratification. 
(Or  if  the  desire  is  completely  met,  we  speak  of  the  change  as 
the  satisfaction  of  the  desire.)  It  is  the  sensation  (feeling) 
which  accompanies  the  getting  of  the  thing  desired.^ 

§  6.  The  idea  of  income.  Desire  is  a  mental  reaching  out 
for  things.  The  fulfilment  of  desire  involves  the  securing  of 
the  objects  of  desire,  and  this  brings  us  to  the  idea  of  income. 
We  find  the  term  used  in  a  number  of  different  senses.  In- 
come may  consist  of  certain  concrete  goods  which  come  in  to 
a  person  during  a  given  period — ^such  as  bread,  butter,  meat, 
clothing,  etc.,  the  quantity  of  which  is  expressed  in  physical 
units,  such  as  bushels,  pounds,  yards,  etc.  A  stream  of  goods 
of  this  sort  is  sometimes  called  "real"  income  in  contrast  with 
monetary  {or  pecuniary)  income,  which  is  a  certain  sum  of 
money — or  its  equivalent  in  credit — received  by  a  person 
within  the  period  under  consideration.  If  this  terminology 
seems  to  imply  that  monetary  income  is  less  "real"  than  an 
income  consisting  of  food,  clothing,  etc.,  the  explanation  is 
that  a  money  income  is  but  a  means  to  an  end.    It  is  likely  to 

1  This  is  the  sense  in  which  we  should  regularly  use  the  term  in 
relation  to  valuation.  But  sometimes  the  word  gratification  is  used  to 
denote  the  pleasure  of  the  senses  which  accompanies  not  the  mere 
getting  of  the  thing,  but  the  using  of  it  after  it  is  secured — for  ex- 
ample, the  sensation  which  accompanies  the  eating  of  food,  the  listen- 
ing to  a  musical  instrument,  or  the  looking  at  a  picture.  The  gratifica- 
tion of  desire  at  the  moment  of  attaining  a  good  reflects  a  provisional 
adjustment  of  choice,  which  is  subject  to  correction  by  experience.  As 
far  as  practice  and  judgment  guide  our  desires,  the  ultimate  use  of  a 
thing  and  the  sensations  which  accompany  that  use,  may  be  deemed 
to  be  the  explanation  of  the  desire.  This  does  not  mean  that  our  pro- 
cesses of  valuation  are  a  cold  calculation  of  the  sensual  gratifications 
to  be  obtained  from  goods.  But  it  does  mean  that  the  anticipated  use 
of  a  thing  enters  into  our  desire  for  it.  And  it  means  also  that  judg- 
ment, foresight,  and  calculation  play  their  part  along  with  instinct  and 
impulse  in  our  desires  and  our  evaliiations. 


Ch.  3]  GOODS  AND  PSYCHIC  INCOME  27 

be  used  to  purchase  all  sorts  of  concrete  goods — such  as  food 
and  clothing — which  are  the  real  objects  of  desire.  However, 
in  the  commercial  world,  and  in  ordinary  life,  we  are  very 
much  in  the  habit  of  expressing  income  as  a  sum  of  money 
accruing  within  a  period.  This  is  perhaps  the  sense  in  which 
the  term  is  most  frequently  used. 

§  7.  Psychic  income.  A  closer  consideration,  however, 
discloses  the  fact  that  there  are  many  desirable  results  which 
cannot  be  included  either  under  "real"  or  under  "monetary" 
income.  JVIany  choices  made  by  men  are  not  directed  to  se- 
curing material  objects.  The  term  real  income  can  hardly  be 
strained  to  include  the  services  of  the  hired  laborer,  the  man 's 
own  direct  services  to  himself,  the  valued  social  esteem  which 
leads  one  to  take  a  lower  salary  for  harder  work,  etc.  It  is 
difficult  to  estimate  such  things  in  monetary  terms  or  in  terms 
of  other  concrete  goods,  and  often  the  attempt  to  do  so  is  not 
made.  For  we  are  dealing  here  with  things  which  are  in  the 
realm  of  feeling.  We  may  call  them  psychic  income,  and  we 
may  define  the  term  psychic  income  as  desirable  results  pro- 
duced in  the  realm  of  feeling  by  valuable  objects  or  by  valu- 
able changes  in  the  environment  which  accrue  to  or  affect  an 
economic  subject  within  a  given  period. 

"We  have  here  reached  something  fundamental  in  our  analy- 
sis. It  is  not  merely  that  many  items  of  income  take  this 
form  and  this  form  only — not  being  embodied  in  any  tangible 
shape.  But  concrete,  tangible  objects  (monetary  or  non-mone- 
tary), are  regarded  as  income,  as  something  desirable,  just  be- 
cause their  ultimate  effect  is  to  bring  about  such  changes  in 
the  realm  of  feeling  as  we  are  now  discussing.  The  food  that 
we  eat  banishes  the  sensation  of  hunger.  Clothing  protects  us 
from  the  cold,  gives  the  feeling  of  being  well-dressed,  etc. 
The  musical  instrument  creates,  through  our  nerves  of  hearing, 
the  pleasurable  feelings  of  harmony.  The  beautiful  picture, 
the  automobile,  the  pleasure  yacht — all  the  many  kinds  of 
concrete  goods  which  man  desires — are  objects  of  desire  to 
him  because  of  their  capacity  to  affect  the  sensory  system, 


28  ELEMENTS  OF  VALUE  AND  PRICE  [Pt.  I 

and,  through  that,  his  mental  life.  It  is  clear,  therefore,  that 
any  adequate  enumeration  of  the  group  of  things  which  we 
call  income  must  take  careful  account  of  these  psychic  ele- 
ments. The  estimate  of  a  man 's  income  merely  in  dollars  may 
leave  out  items  which  are  of  the  greatest  significance  to  him, 
A  man  will  work  for  a  certain  salary  in  an  occupation  that 
he  enjoys  who  might  jefuse  several  times  the  amount  in  a  less 
enjoyable  or  actually  disagreeable  line  of  work.  A  family 
may  choose  to  live  in  a  small  house  in  a  particular  neighbor- 
hood, rather  than  in  a  larger  house  with  greater  physical  com- 
forts in  a  less  attractive  neighborhood.  A  girl  who  can  live 
at  home  may  accept  what  would  otherwise  be  an  inadequate 
wage — an  income  which  would  not  support  her  if  she  lived 
elsewhere. 

§  8.  Motivating  force  of  psychic  income.  It  may  be  seen 
that  (anticipated)  total  psychic  income  is  what  motivates  our 
economic  activity — at  least  as  far  as  this  activity  is  determined 
by  conscious  purpose.  There  are  men  holding  public  office  to 
whom  the  salary  received  is  an  insignificant  consideration. 
They  are  paid  largely  in  public  esteem,  or  in  their  own  con- 
sciousness of  duty  well  performed.  And  in  as  far  as  men 
work  for  material  rewards — money  or  goods — their  ultimate 
ends  are  not  material.  They  are  in  the  realm  of  the  psychic. 
Except  to  the  miser,  money  is  not  an  end  in  itself  (if  it  is  even 
in  that  case).  Nor  are  stocks  and  bonds,  or  real  estate,  or 
even  clothing  and  food,  ends  in  themselves.  Man's  psychic 
life  is  the  thing  which  is  of  ultimate  concern  to  him,  and  all 
these  things  appeal  to  him  because  of  their  relation  to  that 
complex  of  sensations  and  feelings  of  which  his  psychic  life  is 
composed. 

§  9.  The  personal  equation  in  psychic  income.  The  mag- 
nitude of  the  stream  of  psychic  income  depends  in  large  meas- 
ure on  the  natural  temperament,  on  acquired  habits  of  life 
and  thought,  and  on  the  state  of  health  of  the  individual.  One 
person  gets  delight  from  small  things;  another  is  miserable 
in  the  midst  of  luxury.    In  1913  the  richest  man  and  wife  in 


Ch.  3]  GOODS  AND  PSYCHIC  INCOME  29 

Switzerland  committed  suicide  together  because  they  felt  that 
they  had  nothing  to  live  for;  whereas  the  mass  of  the  hard- 
working Swiss  with  their  scanty  material  incomes,  are  as  joy- 
ous and  contented  as  any  people  in  the  world.  Nothing  can 
equalize  these  subjective  differences  between  individuals,  but 
each  individual,  in  his  choice,  compares  things  with  reference 
to  their  psychic  income- value  to  himself;  he  does  not  judge 
them  merely  by  their  physical  or  by  their  pecuniary  measure- 
ments. But  w^hen  in  moralizing  strain,  we  say  that  the  source 
of  happiness  is  within  oneself,  we  speak  within  limits.  For 
the  most  joyous  and  optimistic  of  persons  must  have  some  of 
"this  world's  goods"  or  life  itself  becomes  impossible. 

§  10.  Desire-streams  and  income-streams.  It  is  not 
enough,  however,  that  we  should  have  a  supply  of  goods  at  a 
given  time;  we  need  an  "income  stream."  Our  desires  are 
nearly  all  recurrent.  Hunger,  tho  fully  satisfied,  returns 
again.  One  circus  does  not  last  the  boy  a  lifetime.  New 
clothing  quickly  becomes  old.  We  weather  one  storm  only  to 
feel  an  equal  need  of  shelter  from  the  next.  To  meet  this 
series  of  desires  and  wants  we  require  a  pretty  regular  flow 
of  goods  and  services. 

"We  may  liken  man 's  life  to  a  journey  in  which  the  supplies 
of  food  and  of  other  goods  are  got  at  the  daily  stations.  If 
any  one  of  these  supplies  fails,  the  traveler  suffers  the  pangs 
of  hunger,  and  if  two  or  three  supplies  are  at  one  point,  they 
do  not  serve  his  needs  so  well  as  if  distributed  along  the  way. 
This  almost  unbroken  inflow  of  certain  kinds  of  goods  is  a 
necessity  of  existence.  The  savage  dimly  understands  this 
need.  Even  the  birds  and  the  beasts  adjust  their  lives  to  it 
by  toil  and  by  travel.  The  spring  and  autumn  migrations  to 
new  feeding  grounds  are  the  attempts  of  the  bird  to  secure 
this  income.  The  ant,  the  bee,  and  the  squirrel  anticipate, 
and  work  to  fill  their  storehouses  against  the  days  of  need. 
Man  has  to  take  thought  to  provide  the  much  more  complex 
series  of  goods  upon  which  his  desires  are  directed. 

§  11.    Goods  of  direct,  present  use.    These  goods  are  of 


30  ELEMENTS  OF  VALUE  AND  PRICE  [Pt.  I 

many  kinds,  but  we  may  give  our  first  attention  to  the  goods 
of  present,  direct  use  to  secure  psychic  income.  Such  is  food 
to  the  primitive  man,  a  skin  to  wear  over  his  shoulders,  a  club 
to  defend  himself  against  his  enemies.  Such,  to-day,  is  the 
cup  of  coffee  on  the  table,  the  fire  on  the  hearth,  the  furniture, 
the  house,  the  land  used  for  playground,  tennis  court,  park, 
the  clothing  we  wear,  and  countless  other  objects  in  daily  use. 
Thus  in  every  case  that  a  desire  is  gratified,  whether  of  child 
or  of  man,  of  poor  or  of  rich,  the  relationship  may  be  traced 
between  psychic  income  and  goods  of  direct  use.  Warmth  is 
to  be  had  by  the  use  of  clothing,  shelter,  and  fire;  light  is 
given  by  the  candle,  the  lamp,  and  the  electric  light.  All 
around  men  are  things  just  ready  to  serve  the  final  use  of 
yielding  enjoyment,  or  just  on  the  point  of  "ripening"  or  be- 
coming fitted  to  serve  this  end.  These  goods  of  present,  di- 
rect use  are  the  first  and  almost  the  only  concern  of  the  ani- 
mal, of  the  child,  or  of  the  savage.  To  man  in  developed  eco- 
nomic conditions  these  goods  are  still  the  immediate  objective 
conditions  to  the  creation  of  his  psychic  income. 

§  12.  Directness  of  use  defined.  Directness  of  use  is  that 
quality  a  good  has  of  yielding  to  its  possessor  its  ultimate  eco- 
nomic use  (psychic  income)  without  the  physical  intervention 
of  any  other  agent  (between  itself  and  the  user).  Examples 
of  goods  having  direct  uses  are  food  ready  to  eat,  fuel  to  give 
warmth  to  the  body,  the  candle  to  give  light,  a  beautiful  pic- 
ture, a  riding  horse,  clothing,  ornaments,  furniture,  dwelling 
houses,  general  services  of  all  kinds,  such  as  the  musician's 
song,  the  services  of  actor,  teacher,  lecturer,  preacher,  physi- 
cian. When  these  uses  and  services  produce  psychic  income 
directly  (without  the  aid  of  any  intervening  agent),  they  are 
direct  uses.^ 

2  The  directness  here  considered  must  not  be  confused  with  immediate- 
ness  in  time.  Directness  here  refers  to  the  number  of  steps  or  processes 
that  separate  the  good  from  the  final  use  to  the  ONvner,  It  is  the 
quality  which  an  object  has  when  it  gives  the  sensual  stimulus  which 
results  in  psychic  income.    Time-value  is  the  special  subject  of  Part  IV. 


CHAPTER  4 
PRINCIPLES  OF  EVALUATION 

§  1.  Quality,  a  reflection  of  desire.  §  2.  Substitution  of  goods.  §  3, 
The  principle  of  substitution.  §  4.  Substitution  of  like  and  of  unlike 
goods.  §  5.  Complementary  goods.  §  6.  Changes  of  desires  and  of  valu- 
ations. §  7.  Effect  of  repeated  stimuli  on  our  feelings.  §  8.  Different 
quantities  and  corresponding  desires.  §9.  Stock  of  homogeneous  units: 
principle  of  indifference.  §  10.  Diagram  of  marginal  valuation.  §  11. 
The  paradox  of  value. 

§  1.  Quality,  a  reflection  of  desire.  Our  task  now  is  "to 
explain — in  the  case  of  present,  directly  enjoyable  goods — the 
elementary  principles  of  valuation.  We  have  already  seen 
that  things  have  inherent  physical  and  chemical  qualities 
which  are  quite  beyond  the  power  of  man  to  change.  We  can 
go  further  than  this  and  say  that  no  two  objects  are  exactly 
alike.  Each  object  is  in  an  extremely  literal  sense  a 
"unique."  "Alike  as  two  peas"  means  merely  so  near  to 
likeness  that  the  eye  cannot  detect  the  difference.  The  dif- 
ferences are  minute,  and  for  many  practical  purposes  quite 
negligible.  It  is  such  a  degree  of  likeness  for  practical  pur- 
poses which  we  have  in  mind  when  we  speak  of  a  "  grade ' '  of 
goods,  and  (somewhat  inconsistently)  of  "like"  goods  having 
different  qualities.  Thus  all  apples  may  be  spoken  of  as  being 
"like"  goods.  They  are  alike  botanically;  they  are  also  alike 
to  a  degree  in  the  uses  to  which  they  are  put.  There  are, 
nevertheless,  different  varieties  of  apples,  and  the  apples  of  a 
given  variety  may  always  be  "graded" — according  to  size,  or 
to  color,  or  to  degree  of  perfection — when  the  grower  uses 
them  himself  or  prepares  them  for  the  market.  These  differ- 
ences are  inherent  in  the  apples  themselves.  When,  however, 
we  speak  of  apples  of  "good  quality"  or  "bad  quality,"  we 

31 


32 


ELEMENTS  OF  VALUE  AND  PRICE 


[Pt.I 


mean  simply  that  we  desire  the  so-called  good  ones  more  than 
the  so-called  bad  ones.  As  between  two  apples,  the  one  which 
we  desire  the  more  is  spoken  of  as  of  "good"  or  "superior" 
quality.  But  plainly  the  goodness  or  the  superiority  lies  in 
the  relation  to  our  desires.  So  that  quality  is  partly  a  matter 
of  inherent  differences,  and  partly  a  reflection  of  our  desires. 
Thus  if  (in  Fig.  3)  1,  2,  3,  and  4  are  apples  which  are  prac- 
tically alike  except  in  one  particular — sweetness,  for  example 


Q 


Fia.  3.  Grades  qs  Goods  and  Coeeespondinq  VAtrES. 
The  shading  of  the  circles  indicates  differences  in  physical  qualities 
of  objects,  as  in  color,  in  sweetness,  etc.  Corresponding  with  these  dif- 
ferences the  values,  represented  by  the  columns,  range  from  high  to 
low.  If  the  tops  of  these  columns  be  connected  by  a  line,  its  distance 
above  the  base  line  indicates  the  valuation  of  each  in  terms  of  any  one 
of  the  others. 

— and  if  we  have  a  preference  for  sweet  apples  we  are  likely 
to  rank  them  as  to  value  according  to  their  sweetness. 

§  2.  Substitution  of  goods.  If  now  we  have  an  abundance 
of  apples  of  the  greatest  sweetness  or  best  flavor,  those  of  in- 
ferior quality  will  make  little  appeal  to  our  desires.  The  best 
apples  have  a  high  value ;  the  poorest  have  little  or  none.  Be- 
cause of  their  abundance,  or  the  abundance  of  the  better 
grades,  the  apples  of  inferior  quality  may  even  be  free  goods, 
lacking  in  value  because  not  in  the  smallest  degree  the  objects 
of  desire.  If,  on  the  other  hand,  apples  of  the  finest  flavor 
are  few  in  number,  those  of  the  next  best  grade  will  become 
objects  of  desire,  and  will  therefore  have  a  value  for  us.  We 
come  in  this  way  to  attach  different  values  to  the  different 
grades.    This  act  of  resorting  to  objects  of  inferior  quality 


i 


Ch.4]  principles  OF  EVALUATION  33 

because  of  the  scarcity  of  the  better  grades,  is  substitution 
of  goods.  It  is  but  the  objective  aspect  of  the  shifting  in  our 
desires.  It  is  a  simple  matter,  but  it  has  its  bearing  on  the 
general  problem  of  value.  The  thing  that  is  fundamental  in 
the  valuation  of  different  grades  of  things  is  the  connection  be- 
tween these  various  grades  and  the  desires  of  men. 

In  some  years,  when  the  difference  in  quality  between  the 
grades  of  apples  is  marked  and  there  is  a  large  crop  of  the 
best  grade,  the  small,  knotty  apples  are  free  goods  in  the  or- 
chards, and  are  allowed  to  rot  on  the  ground.  In  other  years, 
when  good  apples  are  scarce,  the  poorer  grades  are  gathered 
and  are  sold  at  good  prices.  But  if  there  is  an  abrupt  differ- 
ence in  quality  between  two  grades,  the  value  of  the  better 
grade  may  rise  considerably  before  there  is  any  use  made  of 
the  poorer.  The  slighter  the  difference  in  quality  the  more 
quickly  appears  the  effect  of  the  presence  of  the  lower  grades 
in  limiting  the  increase  of  value  of  the  higher  grades. 

§  3.  The  principle  of  substitution.  Substitution  of  goods 
in  the  simplest  case  occurs  where  an  individual  is  distributing 
two  or  more  goods  or  kinds  of  goods  to  different  uses.  His 
object  is  to  gratify  his  desires  to  the  maximum,  by  economiz- 
ing the  more  valuable  goods  and  making  the  less  valuable 
goods  serve  some  of  the  same  purposes.  This  may  be  ex- 
pressed as  a  general  principle  of  substitution  as  follows :  goods 
of  kinds  and  of  grades  the  most  valuable  are  applied  to  the 
more  urgent  uses  they  are  capable  of  meeting,  and  less  valu- 
able goods  are  brought  in  to  take  their  place  (substituted)  up 
to  the  point  where  the  value  of  each  use  and  the  value  of  the 
good  applied  to  it  are  equal. 

No  grade  can  be  said  to  be  the  cause  of  the  value  of  the 
others.  There  is  an  independent  reason  for  the  attaching  of 
value  to  each  grade  of  goods.  Each  grade  would  have  value 
if  there  were  none  of  the  other.  But  they  mutually  affect 
each  other's  value  when  they  exist  side  by  side.  The  value 
of  each  is  lessened  by  the  presence  of  the  other.  And  thus 
two  or  many  grades  constitute  for  many  purposes  a  single 


34  ELEMENTS  OF  VALUE  AND  PRICE  [Pt.  I 

group  of  goods  which  shade  gradually  into  each  other  by  the 
shifting  of  choice. 

§  4.  Substitution  of  like  and  of  unlike  goods.  The  cases 
of  substitution  most  easily  called  to  mind  are  between  goods 
very  nearly  alike  in  physical  nature  and  used  for  the  same 
general  purpose:  cotton  and  wool  for  clothing;  fish  and  ven- 
ison, or  peaches  and  pears,  for  food;  candles  and  petroleum 
for  light;  stone,  brick,  and  wood  for  house  building;  horses, 
mules,  and  oxen  for  hauling.  But  cases  may  be  found  which 
range  in  almost  unbroken  series  in  either  direction — towards 
the  substitution  of  practically  like  goods  on  the  one  hand  and 
towards  the  substitution  of  most  unlike  goods  on  the  other. 
One  may  go  without  overshoes  to  get  books,  without  candy 
to  go  to  the  theater,  without  adequate  food  to  get  an  educa- 
tion. 

§  5.  Complementary  goods.  Some  goods,  however,  in- 
stead of  being  substitutes  have  a  complementary  relation  to 
each  other.  Two  or  more  kinds  of  economic  goods  are  said 
to  be  complementary  when  either  one,  instead  of  taking  the 
place  of  the  other,  enhances  its  desirability.  The  one  comple- 
ments (fills  out,  completes)  the  other.  Cases  occur  where  the 
one  good  is  entirely  useless  without  the  other,  as  the  two 
gloves  of  a  pair,  a  gun  without  powder,  fuel  without  flame  to 
light  it,  etc.  In  another  class  of  cases  the  one  is  still  of  some 
value,  but  of  less  value,  without  the  other,  as  salt  in  the  food, 
one  of  a  finely  matched  pair  of  horses,  etc.  In  one  way  or 
another  and  at  various  times,  a  great  many  most  unlike  goods 
may  become  linked  together  in  choice  by  this  complementary 
quality.  This  gives  rise  to  interesting,  sometimes  puzzling, 
problems  of  valuation.  A  group  of  complementary  goods  is 
valued  as  a  whole ;  but  if  one  part  is  missing  the  rest  may  be 
worth  nothing,  and  a  part  may  for  the  moment  be  worth  as 
much  as  the  whole.  If  a  good  in  one  of  its  possible  uses  is 
highly  complementary,  perhaps  indispensable  to  another  good, 
it  will  be  valued  for  that  use,  and  a  substitute  found  in  other 
uses.    Economics  is  full  of  problems  of  complementary  goods. 


ch.4]  principles  of  evaluation  3i 

Some  of  these  occur  in  the  use  of  enjoyable  goods,  and  still 
more  occur  in  production  by  means  of  complementary  agents, 
the  consideration  of  which  must  be  postponed  till  later  in  our 
study. 

§  6.  Changes  of  desires  and  of  valuations.  Choice  is  con- 
stantly being  affected  by  changes  within  men  (subjective)  as 
well  as  by  changes  in  the  objective  conditions.  Desire  is  con- 
stantly shifting ;  different  kinds  of  goods  are  at  every  moment 
being  revalued  according  to  the  new  conditions.  The  use  of 
one  unit  of  a  good  causes  the  valuation  of  the  remaining  por- 
tions to  drop  down  the  scale  for  the  next  moment.  "When  we 
rise  in  the  morning,  we  desire  breakfast;  the  breakfast  eaten, 
another  breakfast  does  not  appeal  to  us.  Our  tasks  done,  we 
take  a  boat  ride  or  go  golfing;  then,  appetite  returning,  we 
are  tempted  to  our  dinner.  And  thus  from  hour  to  hour  de- 
sires are  gratified,  are  altered,  and  are  shifted,  until,  wearied 
with  the  day 's  labors  and  pastimes,  we  go  to  rest.  No  impres- 
sion on  the  nerves  or  on  the  senses  is  lasting.  The  "con- 
sciousness" is  not  a  state;  it  is  a  ceaseless  process.  Man's 
senses  were  evolved  for  the  purpose  of  bringing  him  into  rela- 
tion with  the  outer  world,  of  enabling  him  to  survive  in  his 
struggle  with  the  forces  of  nature.  "When  a  choice  occurs,  the 
corresponding  desire  falls  for  that  particular  moment,  it  may 
be  even  to  zero.  To  keep  desires  satisfied  is  impossible.  De- 
sires recur  for  the  same  reason  that  they  first  arose.  If  they 
did  not  there  would  be  no  motive  for  action.  We  can  not  do 
next  week's  reading  or  next  week's  eating  now.  The  best  re- 
sults in  reading  or  eating  come  from  taking  the  right  amount 
day  by  day.  In  a  well-ordered  life,  in  an  advanced,  economic 
society,  the  means  for  gratifying  desires  as  they  arise  are  pro- 
vided in  advance.  The  changing  series  of  desires  is  met  by  a 
changing  series  of  goods.  Life  has  been  defined  as  a  constant 
adjustment  of  inner  relations  to  outer  conditions.  Economic 
life  is  therefore  like  physical  life,  a  constant  adjustment ;  and 
this  adjustment  of  goods  but  reflects  the  sliifting  and  adjust- 
ment of  feelings. 


86  ELEMENTS  OF  VALUE  AND  PRICE  [Pt.  I 

§  7.  Effect  of  repeated  stimuli.  It  is  in  the  very  nature 
of  man  and  his  nervous  organization  that  any  stimulus  to  the 
nerves,  however  pleasant  for  a  time,  becomes  painful  when 
long  continued  or  increased  unduly.  The  trumpet  too  distant 
at  first  for  the  ear  to  distinguish  its  notes,  may  swell  to  pleas- 
ing tones  as  it  approaches,  until  at  length  its  volume  and  its 
din  may  become  absolutely  painful.  A  man  coming  in  from 
the  winter  storm  and  holding  out  his  hands  before  the  fire 
enjoys  the  warmth  intensely;  a  few  minutes  later  the  same 
lieat  becomes  unpleasant.  In  winter  we  wish  for  a  moderation 
of  the  temperature;  on  the  sultry  days  of  summer  we  think 
of  a  cool  breeze  as  the  most  to  be  desired  of  all  things. 
Whether  the  temperature  rises  or  falls,  there  is  a  point  beyond 
which  the  change  no  longer  adds  to  our  comfort  but  begins 
to  detract  from  it.  A  man,  however  hungry  at  first,  may  be 
made  miserable  if  forced  to  eat  beyond  his  capacity.  The 
first  sup  of  cool  water  is  delicious  to  a  thirsty  man ;  a  second 
and  third  glass,  but  not  more,  may  still  be  grateful.  Forcing 
one  to  take  an  excessive  amount  of  water  is  one  of  the  crudest 
of  tortures  (sometimes  called  the  "water  cure").  Of  every 
economic  object  it  may  be  said,  "One  may  have  too  much  of 
a  good  thing."  The  statement  of  this  relativity  of  desires 
and  successive  gratification,  is  called  the  principle  of  diminish- 
ing gratification.^ 

§  8.  Different  quantities  and  corresponding  desires.  It 
has  already  been  made  clear  that  the  scarcity  or  abundance 
of  a  good  has  its  effect  upon  our  desire  for  that  good.  We 
can  make  use  of  more  or  less  of  it,  but  not  of  an  infinite 
amount.  If  a  very  small  quantity  is  available,  we  may  use 
that  quantity  and  still  feel  a  fairly  intense  desire  for  more. 
If  the  quantity  available  is  large,  our  consumption  may  be  in- 
creased, but  a  desire  (less  intense)  for  more  may  still  remain. 
A  limit  will  be  found  somewhere,  however,  to  the  use  that  we 
can  make  of  the  good,  and  if  this  limit  is  reached — if  the  quan- 
tity available  is  so  great  that  absolutely  all  our  desires  for  it 

1  See  note  on  the  Weber-Fechner  law,  at  end  of  chapter. 


Ch.4] 


PRINCIPLES  OF  EVALUATION 


37 


^'4 


•ft 


are  satisfied — the  value  of  the  good  will  fall  to  zero  for  the 
reason  that  desire  has  completely  ceased.  Clearly  the  in- 
tensity of  desire  changes — and  changes  inversely — with  the 
quantity  of  the  goods  available.  If  now  we  may  be  allowed 
the  latitude  of  speaking  of  these  various  intensities  of  desire 
as  different  desires,  we  may  say  that  there  is  a  series  of  de- 
sires capable  of  being  gratified  by  various  quantities  of  the 
good  in  question.  A  small  amount  will  gratify  the  greatest  or 
most  intense  desire,  an  additional  amount  of  the  good  will  meet 
the  desire  which  comes  next  in  intensity,  and  so  on  until 
finally  we  reach  the  point  where,  with  the  whole  series  of  de- 
sires already  met,  an  additional  amount  finds  desire  completely 
lacking  and  value  therefore  at  the  zero  point. 

§  9.  Stock  of  homogeneous  units ;  principle  of  indiffer- 
ence. If  now  we  consider  a  quantity  (stock)  of  the  good 
which  is  capable  of  gratifying  a  part,  but 
not  all,  of  our  desires,  it  is  plain  that  a 
value  will  attach  to  the  good.  If  it  is 
a  stock  made  up  of  homogeneous  or  iden- 
tical units,  there  is  no  reason  for  pre- 
ferring any  particular  unit  to  any 
other. 

True,  in  advance  of  using  the  goods, 
we  say  that  some  of  the  desires  are  more 
intense  than  the  others.  But  when  we 
begin  to  use  a  stock  of  homogeneous  units  this  difference  must 
disappear.  For  we  will  begin  by  applying  the  goods  first  to 
the  more  intense  desires,  and  as  we  have  just  seen,  this  re- 

*  To  show  this  graphically,  let  the  units  of  goods  be  plotted  on  the 
base  line.  If  but  one  were  present  its  desirability  measured  on  the  per- 
pendicular (valuation  scale)  or  parallel  with  it,  is  indicated  at  the 
height  d;  if  there  were  a  second  unit  its  desirability  would  be  indicated 
by  e;  and  so  on  until  with  six  units  the  value  of  the  sixth  would  be  c. 
But  if  the  units  are  perfectly  interchangeable,  the  value  of  every  unit 
would  now  be  the  same  as  that  of  the  last,  and  is  measured  by  the  height 
of  the  straight  line  be  above  the  base  line,  and  not  by  the  height  of  the 
curve  ac. 


t 


9    0 


I      2    S    ♦ 

[JftnoT  Goocis 

Fia.  4.     The  Pmnciplh 
or  iNDirrsBBMCE.* 


38 


ELEMENTS  OF  VALUE  AND  PRICE 


[Pt.  ). 


duces  their  intensity.  We  then  apply  goods  to  the  desire 
formerly  ranking  next  in  intensity.  And  so  successively,  we 
apply  the  goods  to  the  more  intense  desires  remaining,  and  as 
they  fall  in  intensity  we  take  in,  one  after  another,  the  desires 
which  at  first  were  less  intense,  continuing  until  the  whole 
stock  of  goods  has  been  applied.  In  this  way  we  bring  to 
equality  the  values  of  all  the  units  that  are  actually  used  (if 
the  goods  are  divided  into  very  small  units).  We  have  come 
to  the  limit,  or  the  margin,  of  the  series  of  desires  that  this 
stock  of  goods  is  capable  of  gratifying,  and  outside  of  this 
limit  may  remain  various  ungratified  desires. 

The  marginal  desire  (originally  the  least  intense  of  the  de- 
sires now  gratified)  now  marks  and  expresses  the  actual  value 
of  each  of  the  other  units  of  the  stock.  This  is  the  marginal 
valuation.  The  stock  being  made  up  of  homogeneous  units, 
equally  fitted  to  gratify  any  one  of  the  series  of  desires,  no 
unit  can  be  valued  at  the  moment  more  than  any  other  unit. 
The  aspect  of  valuation  here  presented  is  called  either  the 
marginal  principle  (thinking  of  the  least  intense  desire),  or  the 
principle  of  indifference  (thinking  of  the  equal  fitness  of  the 
objective  units),  and  may  be  expressed  as  follows:  each  unit 
of  a  person's  stock  of  like  goods  which  is  actually  at  hand  and 
equally  convenient  for  use,  is  of  equal  value  with  every  other 
unit,  no  matter  to  what  use  it  is  there  applied.  Of  course  this 
holds  only  as  to  the  particular  time  and  set  of  conditions,  and 
desires  may  change  in  the  next  moment. 

§  10.  Diagram  of  marginal  valuation.  This  principle  of 
valuation  may  be  illustrated  by  the  following  diagram  in  which 

horizontal  distance  represents 
stocks  of  goods  of  various 
amounts,  and  perpendicular 
distance  represents  marginal 
valuation  or  value  per  unit. 
K.»  Let  us  assume  that  in  the  case 
of  a  stock  of  ten  units  the 
marginal  valuation  (value  per 


10 

N 

.b-«* 

^ 

f^ 

r 

^20 

^ 

^ 

b 

§,. 

1 

t:,, 

a 

i 

_ 

_ 

1 

..I— 

1 1 

Fia.  5. 


Number   of    Unit* 
MABQiNAii   Valuation. 


Units  of 

Marginal  valuation  in 

commodity 

terms  of  anything 
else  taken  as  a  standard 

10 

36 

15 

30 

20 

26 

30 

19 

40 

15 

60 

10 

60 

5 

Ch.  4]  PRINCIPLES  OF  EVALUATION  39 

unit)  is  36.  The  value  then  ascribed  to  the  whole  stock  will  be 
360  (represented  on  the  diagram  by  the  rectangle  a6).  If  in- 
stead of  a  stock  of  ten  we  consider  a  stock  of  fifteen,  then  since 
fifteen  units  will  gratify  more  desires  than  ten  units,  leaving 
fewer  desires  still  unsatisfied,  the  marginal  valuation  will  be 
lower — for  example  30  instead  of  36.  In  this  case  the  value 
of  the  stock  is  450  (rectangle  ac).  And  similarly,  for  stocks 
of  various  amounts,  we  get  marginal  and  total  valuations  as 
shown  in  the  following  table: 

Valuation  of 
whole  amount 

360 
450 
500 
570 
600 
500 
300 

The  first  thing  of  significance  in  the  diagram  is  that  the 
marginal  valuation,  or  value  per  unit,  is  large  in  the  case  of 
a  small  stock,  and  small  in  the  case  of  a  large  stock.  And  this 
means  simply  that  when  we  have  a  small  supply  of  a  com- 
modity we  set  a  high  value  (per  unit)  upon  it;  when  we  have 
a  large  supply  its  value  per  unit  to  us  is  small.  This,  of 
course,  is  a  familiar  fact  of  daily  experience.^ 

§  11.  The  paradox  of  value.  One  thing  more  may  be 
pointed  out  by  way  of  further  study  of  the  diagram.  Cor- 
responding with  any  given  stock — for  example  a  stock  of  ten 
units — there  is  a  rectangle  (Fig.  5,  db)  which  represents 
graphically  the  total  value  of  the  stock — ^that  is,  the  product 

2  It  is  evident  that  the  various  parts  of  a  stock  of  goods  can  be 
valued  on  the  marginal  principle  only  when  it  is  possible  to  choose 
among  the  various  units  and  to  apply  them  to  various  uses  in  such 
proportions  as  one  will.  If  another  person  controls  the  whole  stock 
and  compels  us  to  choose  "all  or  none"  we  may  be  forced  to  value 
the  whole  stock  according  to  our  more  intense  desires.  This  is  a  fact 
of  great  importance  in  some  practical  problems,  such  as  those  of 
monopoly. 


40 


ELEMENTS  OF  VALUE  AND  PRICE 


[Pt.I 


of  the  value  per  unit  by  the  number  of  units.  In  the  case  of 
a  very  small  stock  this  rectangle  will  be  very  small.  On  the 
other  hand,  in  the  case  of  a  very  large  stock,  since  the  value 
per  unit  is  small  and  may  even  reach  zero,  the  rectangle  will 
also  be  very  small,  reaching  zero,  as  we  have  already  seen, 
in  the  case  of  free  goods.  Somewhere  in  between  these  two 
extremes,  of  course,  there  will  be  a  maximum  rectangle  (Fig. 
5,  a/),  a  stock  the  total  value  of  which  is  greater  than  that 
of  either  a  larger  or  a  smaller  stock.  This  fact  (brought  out 
also  in  the  third  column  of  the  table)  that  after  a  certain 
point  an  increase  of  the  total  stock  will  result  in  a  decrease 
of  the  total  value,  has  been  called  the  "paradox  of  value." 
Cases  have  been  known  of  the  partial  destruction  of  a  stock 
of  goods  by  its  owners  as  the  result  of  their  calculation  that 
the  remainder  would  actually  sell  on  the  market  for  more  than 
could  be  secured  for  the  whole  original  supply. 


Note 

The  Weber-Fechner  Law.  In  part  the  effects  of  repeated  Btimuli  are 
probably  explained  by  a  law  of  psychology.  It  is  that  geometric 
increase  of  the  stimuli  acting  on  any  of  the  senses  is  required  to  produce 
an  arithmetic  increase  of  sensation.  It  holds 
"approximately  and  within  a  certain  middle  re- 
gion of  the  intensive  scale  for  intensities  of 
noise  and  tone,  of  pressure,  of  various  kines- 
thetic complexes  (lifted  weights,  movements  of 
the  arms,  movements  of  the  eyes),  and  of  smell." 
"There  is  some  little  evidence  that  affection 
on  the  intensive  side  obeys  Weber's  law." 
(Titchener,  "A  Textbook  of  Psychology,"  1911, 
pp.  218,  259.) 

The  points  on  the  curve  R  to  R  indicate 
the  total  stimuli  (measured  on  the  ordinate 
by  scale  shown  at  right)  required  to  produce 
a  given  degree  of  sensation,  shown  by  abscissas 
measured  on  line  S    to  S  .     While  the  stimuli 

0  4 

increase  in  geometric  ratio  (1,  2,  4,  8)  the  sen- 
sations increase  in  an  arithmetic  ratio  (1,  2, 
3,  4.)     The  relative  quantity  of  sensation  per 


Fia.     6.    Thb     Wibi>> 
Fkchnks   Law. 


Ch.4]  principles  of  evaluation  41 

unit  of  Btimulus  is  represented  by  the  height  of  a,  b,  c,  d  respec- 
tively above  the  base  line.  The  second  R  produces  sensation  equal 
to  the  first,  the  third  and  fourth  R  (average)  produce  I/2  &8  much 
sensation,  the  6th  to  8th  R  (average)  produce  y^  as  much.  The 
curve  a-d  corresponds  with  the  observed  trend  of  decreasing  valua- 
tion in  many  cases.  It  is  clear,  however,  that  valuation  does  not  al- 
ways (perhaps  not  usually)  rise  and  fall  in  curves  exactly  parallel  with 
sensation;  for  example,  a  first  and  a  second  imit  of  R  might  (if  there 
were  no  more)  be  neither  pleasurable  nor  valuable;  a  third  and  fourth 
might  raise  the  total  sensation  to  a  degree  where  it  was  desirable  and 
valuable;  and  not  until  the  fifth  or  some  latter  unit  would  an  addi- 
tional unit  of  R  add  a  smaller  proportional  value.  The  correspondence 
between  decreasing  sensation  and  decreasing  valuation  is  thus  found 
only  at  certain  middle  regions  of  the  scale. 


CHAPTER  5 
TRADE  BY  BARTER 

§  1.  Advantage  of  trade.  §  2.  Barter.  §  3.  Some  trading  terma  de- 
fined. §  4.  The  problem  of  price  in  simple  barter.  §  5.  Demand.  §  6. 
Supply.     §  7.  Limits  of  advantage  in  isolated  barter. 

§  1.  Advantage  of  trade.^  Whenever  two  persons  having 
valuable  goods  meet,  there  is  a  chance  that  their  valuations  of 
goods  at  that  time  will  not  be  the  same.  One  person  may 
have  more  food  than  he  needs  at  the  time  but  be  lacking  in 
clothing.  If  each  gives  to  the  other  some  of  the  good  which 
to  him  has  smaller  value,  and  receives  some  of  the  other  good, 
in  an  amount  which  to  him  is  more  valuable,  each  of  the  two 
parties  will  be  the  gainer.  This  mutual  giving  is  trade. 
Trade  increases  the  range  of  choice  open  to  men.  Each  good 
that  can  be  traded  takes  on  a  new  importance,  that  of  pro- 
curing other  things  in  trade.    In  addition  to  its  own  power  to 

1  Definition  of  trade.  Of  several  meanings  that  the  word  trade  has 
had,  two  are  still  usual:  (1)  a  regular  occupation,  more  especially  a 
handicraft,  as  the  carpenter's  trade,  to  learn  a  trade,  used  thus  in 
reference  to  labor  problems,  the  trade  imion,  etc.;  (2)  an  exchange  of 
goods.  In  the  latter  sense  it  may  have  a  general  meaning,  (a)  an 
exchange  of  goods  whether  made  by  the  use  of  money,  or  otherwise, 
when  there  are  several  traders  present  or  only  two;  or  (b)  exchange 
between  two  traders,  without  the  use  of  money.  Usually  it  has  this 
meaning  in  such  expressions  as  "a  horse  trade,"  a  "knife  trade,"  etc. 
Used  verbally,  to  trade  has  as  synonyms:  (a)  to  exchange,  to  traffic,  and 
(b)  to  barter,  to  truck,  to  swap,  or  swop,  used  colloquially  in  England 
and  Scotland  as  well  as  in  the  United  States.  We  shall  use  "trade" 
in  the  broader  sense  (2a)  of  exchange  by  whatever  means,  and  shall 
employ  the  word  barter  in  the  special  sense  (2b)  of  trade  without 
the  use  of  money,  while  we  may  call  cash  trading,  or  monetary  buying 
and  selling,  the  case  of  trade  where  money  is  used. 

42 


Ch.  5]  TRADE  BY  BARTER  43 

gratify  a  desire,  it  gains  a  representative  quality  and  appeals 
to  desires  with  the  power  of  all  the  other  objects  for  which  it 
can  be  traded.  It  draws  its  value  from  two  or  more  sources, 
one  source  being  its  own  direct  uses,  the  other  sources  being 
the  uses  of  each  thing  for  which  it  may  be  traded.  This  led 
men  to  speak  of  value-in-use  and  value-in-exchange.  But  it 
must  not  be  thought  that  an  object  has  to  any  one  person  two 
values  at  once;  for  as  each  good  had  before  but  one  value  at 
a  time  to  any  one  person  tho  it  had  many  uses,  so  when 
it  gets  the  trading  use,  it  continues  to  have  but  one  value  at 
a  time,  as  determined  at  the  margin  of  least  urgent  desire.^ 

Readiness  to  trade  shows  a  man's  desire  to  redistribute 
his  goods  in  accordance  with  the  principle  of  substitution. 
He  virtually  says:  "Part  of  what  I  have  I  am  ready  to  give 
for  part  of  what  you  have. ' '  The  relative  strength  of  his  de- 
sire for  the  other  good  is  expressed  in  part  by  the  amount  of 
his  offer.  When  he  makes  this  comparison  and  this  offer,  he 
enters  into  the  social,  economic  relation  of  trade  with  his 
fellows. 

§  2.  Barter.  Trade  without  the  use  of  money  or  even  the 
form  of  the  money-expression,  is  rarely  seen  by  the  city  boy 
to-day.  Yet  it  has  played  a  great  part  in  economic  history. 
In  early  societies  the  differing  natural  products  of  different 
localities  were  the  most  usual  objects  of  trade.  Salt,  so  es- 
sential to  life,  is  on  the  whole  plentiful,  but  it  is  found  in 
comparatively  few  places,  in  rare  springs,  and  in  the  salt  seas, 
and  was  eagerly  brought  from  great  distances.  Copper,  when 
it  took  the  place  of  stone  as  the  material  for  weapons  of  de- 
fense or  of  the  chase,  was  sought  far  and  wide.  Rare  shells, 
feathers,  jewels,  and  the  precious  metals  appealed  in  early 
times  to  a  universal  desire  for  ornament.  Products  like  these 
were  in  early  times  the  objects  of  a  rude  sort  of  trade,  which 
took  the  form  of  gift-making  or  of  barter,  accompanied  by 
much  higgling,  in  the  simple  efforts  to  adjust  possessions  better 
to  desires.    In  the  ]\Iiddle  Ages,  outside  the  cities,  which  were 

*  See  ch.  4,  sec.  9, 


44  ELEMENTS  OF  VALUE  AND  PRICE       [Pt.  I 

very  small  compared  with  those  of  to-day,  almost  universally 
a  "barter  economy"  prevailed  or,  as  it  has  been  called,  a  "nat- 
ural economy"  (a  term  taken  from  the  German  * ' Naturalien, " 
which  means  natural  products,  enjoyable  things,  as  opposed 
to  money).  Natural  economy,  therefore,  means  that  condi- 
tion of  society  in  which  things  are  exchanged  "in  kind."  In 
the  JNIiddle  Ages  land  was  the  chief  form  of  wealth.  Even 
princes  were  dependent  on  the  products  of  land  for  their  in- 
comes. The  peasants  were  "paid"  (as  we  think  of  it)  for 
their  work  by  the  grant  of  the  use  of  land.  The  income  of 
the  landlords  was  in  the  form  of  "Naturalien"  (wheat, 
chickens,  eggs,  etc.,  as  well  as  labor),  the  kind  and  amount  of 
which  were  fixed  by  contract  or  by  immemorial  usage.  The 
use  of  money  has  greatly  changed  these  conditions  in  Europe 
and  America,  but  barter  still  is  used  in  outlying  districts,  and 
in  backward  countries.  It  occurs  more  frequently  than  one 
is  likely  to  think,  in  trade  between  savages  and  civilized 
traders,  in  rural  districts,  on  the  school  grounds,  between 
neighbors  in  horse  trades  and  house  trades,  in  multitudes  of 
trades  made  by  the  help  of  want  advertisements,  and  in  many 
other  cases. 

The  extent  of  the  use  of  barter  to-day  does  not,  however, 
measure  the  importance  to  the  economic  student  of  under- 
standing it.  The  true  measure  is  the  fact  that  without  com- 
prehending the  process  of  barter  it  is  impossible  to  comprehend 
much  beyond  the  superficial  aspects  of  developed  markets  and 
prices.  The  zoologist  studies  the  simpler  forms  of  life,  uni- 
cellular or  little  organized,  as  the  best  way  to  understand  the 
higher  organisms;  so  we  must  analyze  the  simplest  forms  of 
trade  as  a  means  to  the  comprehension  of  the  most  complex. 
Barter  contains  within  it  the  elements  from  which  develop  all 
the  forms  of  commerce. 

§  3.  Some  trading  terms  defined.  Buyer  and  seller  are 
the  two  parties  to  the  transaction,  the  two  traders ;  the  buyer 
being  the  one  acquiring  a  good  not  in  his  possession,  the  seller 
the  one  giving  up  the  possession  of  that  good  in  return  for 


Ch.  6]  TRADE  BY  BARTER  45 

something  else.  Either  of  the  goods  may  be  taken  as  the  point 
of  departure  in  thought,  and  either  party  to  the  trade  may  be 
then  looked  upon  as  buyer  or  as  seller. 

Price  is  the  good  given  by  a  buyer  in  a  trade.  In  barter 
either  good  may  be  looked  upon  as  the  price  of  the  other.  At 
present  one  of  the  two  goods  is  most  often  money  of  some  par- 
ticular kind  expressly  mentioned,  or  clearly  implied.  When 
money  is  used  in  a  trade,  its  quantity  is  looked  upon  as  the 
price,  and  the  other  good  is  looked  upon  as  sold  for,  and  bought 
with  money.  Price  may  be  per  piece  of  a  conventional 
size,  as  per  quart,  bushel,  yard,  pound,  or  for  the  entire  group 
of  objects  or  amount  bought,  as  the  price  of  a  farm,  of  an 
entire  stock  of  goods,  etc.,  as  is  likewise  usually  shown  by  the 
context.  The  other  good,  that  for  which  a  price  is  paid,  may 
be  called  the  sale-good. 

§  4.  The  problem  of  price.  Few  words  are  more  often  on 
the  lips  to-day  than  price.  If  the  price  of  a  thing  is  high,  the 
thing  is  dear ;  if  price  is  low,  it  is  cheap.  What  makes  things 
cheap  or  dear  ?  That  question  puts  the  price  problem.  It  is 
a  matter  of  every-day  observation  that  when  things  are  more 
plentiful  than  usual  they  are  pretty  sure  to  be  cheaper ;  when 
they  are  scarcer  than  usual  they  probably  will  be  dearer. 
Hens  lay  few  eggs  in  the  winter,  but  many  in  the  spring. 
Apples  are  few  on  the  trees  and  of  poor  quality  one  year,  and 
plentiful  the  next.  Kains  are  late  and  inadequate,  and  the 
crop  of  cotton  in  the  South,  or  of  com  in  the  Middle  West,  or 
of  hay  in  the  Northeast  of  the  United  States  is  small,  and  as 
quantity  is  small  prices  are  high.  Every  one  knows  in  this 
general  way  about  prices  and  the  reasons  why  prices  change. 
Some  men  of  business  become  astonishingly  skilled  in  follow- 
ing and  anticipating  the  changes  in  price  of  the  particular 
goods  in  which  they  deal.  But  the  purpose  of  the  student  of 
economics  is  not  to  learn  the  conditions  that  influence  the 
prices  of  particular  goods  except  as  they  may  serve  as  exam- 
ples, but  rather  it  is  to  understand  the  general  nature  of  all 
price  movements  and  the  principles  determining  all  prices. 


46  ELEMENTS  OF  VALUE  AND  PRICE  [Pt.  I 

The  thoro  pursuit  of  this  purpose  is  a  large  part  of  the 
task  of  economic  study. 

§  5.  Demand.  The  phrase  demand  and  supply  is  very  fre- 
quently used  as  an  explanation  of  economic  problems,  with- 
out any  clear  conception  of  the  meaning  of  the  words.  Let  us 
examine  the  meaning  and  the  difficulties  of  the  phrase. 

Demand  conveys  the  idea  partly  of  the  intensity  of  the  de- 
sire of  a  trader  for  a  certain  good,  partly  of  his  having  some- 
thing (a  certain  amount)  which  he  is  willing  to  give  for  it, 
and  partly  of  the  amount  of  goods  which  he  desires  to  buy  at 
the  price.  Thus  we  may  define:  demand  is  a  certain  quan- 
tity of  goods  desired  at  a  certain  price,  united  with  the 
power  to  give  the  amount  of  the  price  in  trade  for  it.  Real 
demand  refers  to  actual  trade,  for  demand  is  effective  only  if 
desire  is  backed  by  the  price  needed  to  induce  the  other  party 
to  trade.  It  is  convenient,  however,  to  speak  of  potential  de- 
mand as  the  amount  which  buyers  would  be  ready  to  take  at 
some  specified  price. 

The  hungry  boy  looking  longingly  at  the  sweetmeats  in  the 
confectioner's  window,  represents  mere  desire;  not  until  the 
kind-hearted  gentleman  gives  him  a  nickel  does  he  represent 
demand  for  sweetmeats,  and  then  only  in  case  the  sweets  are 
the  nickel's  worth  that  he  most  desires,  and  not  then  unless  the 
confectioner  is  willing  to  part  with  the  coveted  article  for  a 
nickel.  Demand  is  actual,  desire  for  a  sale-good  is  effective, 
only  in  reference  to  a  certain  price,  the  quantity  of  the  goods 
which  the  seller  will  take  for  it.  We  may  speak  of  the  in- 
tensity of  desire,  but  should  say  rather  the  extent  (or  amount, 
the  number  of  units)  of  demand. 

§  6.  Supply.  Supply  is  the  correlative  of  demand  in  the 
phrase,  demand  and  supply;  it  is  the  amount  of  sale-goods 
which  sellers  are  actually  ready  to  trade  at  a  given  price. 
Supply  implies  the  existence  of  desire  as  surely  as  does  de- 
mand. Indeed,  supply  may  be  defined  as  desire  for  a  certain 
quantity  of  price-goods,  at  a  certain  ratio  of  exchange,  united 
with  the  power  to  give  sale-goods  for  them.    Supply  should 


Ch.  5]  TRADE  BY  BAKTER  47 

not  be  confused  with  the  stock  in  possession.  The  two  may 
differ  greatly,  for  at  a  given  price  a  person  may  choose  to 
offer  for  trade  little  or  none  at  all  of  a  good,  even  tho  he 
has  a  considerable  stock  of  it  on  hand.  Demand  and  supply 
vary  as  the  price  changes,  but  in  opposite  directions.  Demand 
varies  inversely  with  price  (rises  as  price  falls),  and  supply 
varies  directly  with  price  (rises  as  price  rises). 

§  7.  Limits  of  advantage  in  isolated  barter.  In  barter 
the  trade  can  take  place  only  within  certain  limits  of  price  per- 
mitting each  party  to  gain  somewhat  by  the  choice.  The  num- 
ber of  units  of  sale-goods  compared  with  those  of  the  price 
(each  in  some  specific  unit,  as  pound,  yard,  gallon,  etc.),  ex- 
presses the  ratio  of  trade  (or  ratio-of-exchange).  When  two 
farmers  "trade  even,"  a  horse  for  a  cow,  either  the  horse  or 
the  cow  may  be  looked  upon  as  the  price  of  the  other  good,  and 
the  ratio  of  exchange  is  1  to  1.  But  the  fact  that  in  trade 
one  thing  is  equal  to  the  other  does  not  mean  that  in  either 
trader's  opinion  the  values  of  the  two  things  are  equal.  In- 
deed the  very  motive  of  the  trade  to  each  party  is  that  he 
may  get  what  is  to  him  a  more  valuable  for  a  less  valuable 
object.  To  even  up  a  trade  something  may  be  given  "to 
boot"  and  one  thing  be  traded  for  a  group  of  things,  as  a 
gun  for  a  boat  and  a  set  of  fishing  tackle,  or  one  rabbit  for  a 
lot  of  25  fish.^  It  must  nearly  always  be  the  case  that  there 
are  several  ratios  of  exchange  at  which  a  trader  has  more  or 
less  of  a  motive  to  trade. 

"Where  there  are  only  two  (or  a  small  number  of)  traders 
there  is  a  considerable  range  for  bargaining,  or  higgling.  For 
example,  the  owner  of  the  rabbit  might  be  willing  to  take  20 
fish  rather  than  not  to  trade,  and  the  owner  of  the  fish  might 
rather  give  30  fish  than  go  without  the  rabbit.  It  is  not  at 
all  certain  that  in  such  a  case  the  trade  will  be  at  a  ratio 
arithmetically  midway  between  the  extremes.  Higgling  is  il- 
lustrated by  the  old-time  American  horse  trade,  in  which  so 

*Tinot  means  amends,  compensation,  from  the  same  root  as  better, 
bost.  thus  to  make  good,  to  even  up  a  trade. 


48  ELEMENTS  OF  VALUE  AND  PRICE  [Pt.  I 

much  depends  on  "bluff";  in  such  cases  it  is  as  important  to 
be  able  to  judge  character  as  to  judge  horses,  for  the  bar- 
gain will  be  concluded  at  a  ratio  of  price  to  sale-good  which 
exactly  balances  the  hope  of  gain  and  fear  of  loss  by  one  of 
the  parties.  This  same  margin  for  higgling  appears  in  most 
exchanges  between  two  somewhat  isolated  traders,  even  in 
highly  developed  business. 

The  effect  that  duplicate  and  additional  units  of  a  good  have 
on  valuation  (principle  of  diminishing  gratification)  is  the 
most  frequent  cause  of  barter.  The  owner,  in  accordance  with 
the  principle  of  substitution,  seeks  to  trade  some  of  his  stock 
of  a  good  (those  units  which  correspond  to  less  intense,  direct 
uses)  for  goods  which  he  lacks  entirely  or  values  more  highly. 
A  hunter  with  a  large  pack  will  be  glad  to  trade  a  part  of  his 
furs  for  a  part  of  the  farmer's  grain  and  fruit.  He  thus 
gives  up  the  satisfaction  of  his  marginal,  less  intense  desires  for 
furs  to  gratify  his  more  intense  desires  for  grain  and  fruit. 
But  (having  meat  to  eat)  he  would  not,  at  any  price,  trade  for 
food  all  the  furs  he  has.  Thus,  when  goods  are  turned  to  their 
trade-uses,  new  levels  of  actual  valuations  for  each  of  the  two 
kinds  of  goods  result  in  place  of  those  existing  before  the 
trade. 

It  should  be  clear  from  this  chapter  that  any  true  trade 
must  be  mutual  and  voluntary.  It  thus  differs  from  gift- 
making,  stealing,  extortion,  taxation,  etc.  True  trade  is  of 
mutual  advantage  to  the  parties,  at  least  is  believed  to  be 
so  at  the  moment.  It  is  this  which  makes  trade  rational.  It 
is  a  mode  of  substituting  more  desirable  for  less  desirable 
goods. 

A  popular  idea  very  difficult  to  uproot  is  that  if  one  party 
to  a  trade  gains  the  other  must  lose.  This  idea  was  generally 
held  in  ancient  times  and  in  the  Middle  Ages,  and  seems  to 
have  been  connected  with  the  notion  that  value  is  something 
fixed  in  a  good  and  unchangeable.  This  seems  to  have  been 
one  reason  for  the  poor  opinion  held  of  merchants,  tho  the 
frequency  of  fraud  in  trade  with  strangers  strengthened  this 


Ch.5] 


TRADE  BY  BARTER 


opinion.  But  if  goods  having  a  small  value  may  be  given  a 
higher  value  by  being  traded,  trade  and  the  work  of  merchants, 
peddlers,  and  carriers  of  all  sorts,  may  be  a  value-increasing 
process. 


CHAPTER  6 

MONEY  AND  MARKETS 

f  1.  Money  and  evaluation.  §  2.  Origin  of  money.  §  3.  The  use  of 
money  and  money-prices.  §  4.  The  standard  price  unit.  §  6.  Repre- 
sentative quality  of  money.  §  6.  The  sale  at  auction.  §  7.  Bids  in 
relation  to  valuations.  §  8.  Effect  of  multiplicate  units  of  supply.  §  9. 
Successive  price  levels  through  uncertainty.  §  10.  Auctions  with  reserve 
valuations.  §  11.  Origin  of  markets.  §  12.  Transportation  and  the  ex- 
tent of  markets.  §  13.  Ck)mmunication  and  markets.  §  14.  One  price 
in  a  market.     §  15.  Imperfect  market  conditions. 

§  1.  Money  and  evaluation.  In  the  last  chapter  it  was 
seen  why  a  process  of  delicate  price  fixing  can  not  go  on  in  a 
state  of  true  barter.  The  lack  of  correspondence  between  the 
amounts  of  the  two  goods,  makes  very  exact  estimates  of  the 
value  of  goods  in  barter  difficult  and  often  impossible.  There- 
fore, in  the  earlier  stages  of  society,  no  careful  estimate  of 
value  is  made  by  the  individual.  Children  do  not  make  it. 
The  typical  trade  of  the  small  boy  is  a  "trade  even";  Johnny 
exchanges  his  gingerbread  for  Jimmie's  jack-knife.  It  marks 
an  epoch  in  the  industrial  development  of  the  boy  when  he 
begins  to  keep  store  with  pins,  and  no  longer  trades  candy  for 
apples,  but  both  for  pins,  which  have  become  the  means  of 
trade  in  his  boy  world.  He  then  can  express  values  in  much 
more  exact  terms.  In  our  society  most  children  begin  early 
to  grow  familiar  with  this  conception  of  some  thing  used 
as  a  means  of  trading  other  goods;  but  travelers  find  some 
savage  tribes  still  in  the  earlier  childish  stage  of  development, 
unable  to  grasp  the  thought,  or  understand  the  use,  of  money. 
When  through  lack  of  money  there  is  a  failure  to  adjust  val- 
uation, there  is  a  loss  of  the  possible  advantage  in  each  trade. 
There  is  a  further  waste  of  time  and  of  effort  to  find  something 

60 


Ch.  6]  MONEY  AND  MARKETS  51 

that  will  be  accepted  in  barter,  and  the  loss  offsets  a  large 
part  of  the  gain  even  when  the  barter  is  effected. 

§  2,  Origin  of  money.  These  difficulties  are  met  by  the  use 
of  money.  Some  kind  of  good  in  general  use  comes  to  be  ac- 
cepted as  a  medium  of  trade.  Money  is  simply  one  kind  of 
wealth  which  is  taken,  not  for  itself,  but  to  pass  along.  Each 
person  takes  it  in  the  belief  that  it  will  enable  him  to  distribute 
his  purchasing  power  in  a  more  effective  way.  Money  was 
not  an  invention,  as  are  some  mechanical  devices,  suddenly 
hit  upon,  but  it  was  invented  in  the  sense  that  the  use  as 
money  of  this  or  that  object  grew  into  a  social  custom  as  its 
convenience  was  tested  by  practice.  Money  is  used  in  some 
degree  everywhere  except  in  the  most  primitive  tribes.  His- 
torically viewed,  the  money  first  used  in  any  community  seems 
in  every  case  to  have  been  an  object  capable  of  giving  im- 
mediate enjoyment  to  its  possessor:  salt,  furs,  rare  feathers, 
bronze  for  weapons,  silver  and  gold  for  ornaments,  etc.  This 
valuable  good  then  gradually  comes  to  be  used  as  money,  add- 
ing to  its  value-in-use  this  quality  of  value-in-exchange. 

§  3.  The  use  of  money  and  money-prices.  A  money- 
economy  is  a  social  organization,  or  an  economic  community, 
where  money  is  generally  used  as  the  means  of  payment,  in 
contrast  with  a  barter-economy  where  trade  is  carried  on  with- 
out the  use  of  money.  In  either  case  it  is  a  matter  of  degree, 
and  actually  both  methods  are  found  in  use  in  any  modern 
community  in  varying  proportions.  The  numerous  problems 
arising  with  the  use  of  money  in  a  money-economy  make  up 
an  important  sub-division  of  economics,  which  must  in  the  main 
be  reserved  for  later  study.  Our  present  purpose,  however, 
is  merely  to  get  in  mind  a  few  fundamental  ideas  regarding 
the  use  of  money  as  a  standard  of  current  prices. 

Goods  had  value  long  before  such  a  thing  as  money  was 
known  in  the  world.  All  the  essential  features  of  the  valua- 
tion process  are  possible  without  reference  to  money.  But  the 
great  bulk  of  the  trade  of  the  world  is  effected  through  the 
instrumentality  of  money  (and  credit),  and  prices  are  nearly 


6t  ELEMENTS  OF  VALUE  AND  PRICE  [Pt.  I 

always  quoted  in  money  terms.  So,  altho  there  may  be 
valuation  and  even  a  certain  amount  of  trade  (and  therefore 
prices)  without  the  use  of  money,  it  is  natural  for  us  to  look 
for  concrete  illustrations  of  trade  and  of  price  to  the  money 
transactions  which  are  taking  place  around  us  all  the  time — 
the  familiar  purchase  of  a  good  for  money.  Moreover,  while 
the  explanation  of  the  more  complicated  problem  of  market 
prices  without  reference  to  money  is  quite  possible,  it  is  sim- 
plified by  having  these  prices  expressed  in  money  terms. 

§  4.  The  standard  price  unit.  In  every  civilized  country 
to-day,  some  one  valuable  metal,  either  gold  or  silver,  is  se- 
lected as  the  standard  money  material,  and  a  certain  number 
of  grains  of  the  metal,  of  a  certain  degree  of  fineness,  duly 
stamped  by  governmental  authority,  is  the  standard  coin  or 
monetary  unit.  This  unit  in  the  United  States  is  called  a 
dollar,  consisting  of  23.22  grains  of  "fine  gold"  (or  25.8  grains 
of  "standard  gold"  nine  tenths  fine) ;  in  Great  Britain  it  is 
the  pound,  containing  113.001605  grains  of  fine  gold ;  in  Ger- 
many it  is  the  mark,  containing  5.5312  grains ;  and  in  France 
it  is  the  franc,  containing  4.4803  grains.  The  coinage  of  the 
dollar  gold  piece  was  discontinued  in  the  United  States  in 
1890,  and  gold  is  coined  in  multiples  of  a  dollar  in  quarter 
and  half  eagles,  eagles  ($10.00),  and  double  eagles.  Other 
pieces  of  metal  and  paper,  properly  stamped,  are  also  called 
dollars,  but  the  value  of  each  of  those  is  always  now  maintained 
practically  equal  to  the  value  of  the  gold  dollar.^  When  we 
discuss  market  prices  to-day  in  America  in  terms  of  money, 
we  may  think,  therefore,  of  the  price  as  being  a  quantity  of 
gold,  some  multiple  of  a  piece  weighing  25.8  grains. 

§  5.  Representative  quality  of  money.  Buying  and  sell- 
ing by  means  of  money  is  not  essentially  different  from  a  case 
of  barter  in  which  gold  (or  other  standard  money)  is  one  of 
the  two  goods  in  the  trade.  Except  in  the  rarest  cases,  the 
price-good,  money,  is  taken  by  the  seller  for  its  power-in-ex- 

1  By  proper  safeguards  regarding  their  quantity  and  their  ready  ex- 
changeability for  gold. 


Ch.  6]  MONEY  AND  MARKETS  53 

change  for  other  goods,  not  as  metal  to  be  used  in  the  arts. 
The  money  is  taken  for  its  representative  quality  (see  above, 
section  2)  ;  it  represents  to  the  trader  the  desirability  of  the 
things  that  it  can  be  expected  to  buy.  Money  becomes  in  the 
thought  of  the  traders  something  like  an  algebraic  symbol,  but 
it  stands  for  different  things  and  groups  of  things  to  different 
traders,  and  to  each  its  significance  changes  from  one  moment 
to  another,  according  as  he  chooses  to  use  it  in  buying  different 
goods. 

"When  numerous  things  are  bartered,  the  ratio  in  one  transac- 
tion is  unrelated  with  that  in  another.  Tho  there  might  be 
at  the  same  time  and  place  a  hundred  acts  of  barter,  as 
sheep  for  cloth  and  wheat  for  shoes,  etc.,  in  large  part  each 
j  act  of  barter  stands  by  itself  in  the  thoughts  of  men.  There 
'  is  no  common  unit  of  comparison  for  prices.  But  if  sheep, 
cloth,  wheat,  and  shoes  are  each  in  turn  sold  and  bought  with 
the  money  unit,  money  becomes  a  common  unit  of  expression 
not  only  for  prices  on  the  market,  but  for  the  various  individ- 
uals' valuations  of  goods.  The  habit  of  comparing  goods  in 
terms  of  money  grows,  and  for  convenience  men  frame  their 
own  valuations  in  monetary  terms,  as  they  approach  a  trade 
to  bid  and  ask,  and  buy  and  sell. 

§  6.  The  sale  at  auction.  Let  us  now  approach  the  price 
problem  as  it  presents  itself  when  groups  of  traders  come  to- 
gether, and  where  bids  are  expressed  in  some  common  unit  of 
price.  We  will  consider  first  the  simplest  case  of  price  fixing 
in  a  group,  that  of  the  auction  sale.  In  auctions  on  the  Dutch 
plan  the  auctioneer  first  names  a  high  price  and  then  succes- 
sively lowers  the  price  until  some  buyer  takes  it.  Balancing 
his  hopes  and  fears,  some  one  bids  it  in,  because  he  fears  that 
when  a  lower  price  is  named  some  one  else  will  take  it.  In 
auction  sales  on  the  English  plan  the  auctioneer  asks,  "What 

I  am  I  bid?"  and  after  getting  "a  starter"  he  stimulates  the 
desire  of  the  bidders  by  praise  of  the  sale-goods,  keeps  the 
crowd  good  natured  and  optimistic  by  artful  story  telling, 
arouses  the  spirit  of  rivalry  in  the  bidders,  and  excites  their 
I 


64  ELEMENTS  OF  VALUE  AND  PRICE  [Pt.  i 

fears  by  skilful  threats  of  "going,  going,"  until,  shrewdly 
watching  their  faces,  he  feels  that  the  limit  is  reached.  Then 
he  lets  fall  the  hammer,  "knocking  the  article  off"  to  the 
"lucky  buyer."  The  auctioneer  in  all  this  is  himself  under 
some  pressure,  and  the  success  of  the  sale  as  a  whole  depends 
much  on  his  skill.  He  dare  not  delay  long  for  a  higher  bid 
on  any  one  article,  for  unless  the  bidders  continue  to  believe 
that  things  can  be  had  at  low  prices  (i.e.,  at  less  than  new 
goods  will  ordinarily  bring)  the  interest  flags  and  the  crowd 

melts  away. 

§  7.  Bids  in  relation  to  valuations.  Note  how  the  prices 
paid  are  related  to  the  valuations  of  the  bidders.  Suppose 
that  an  ax  is  to  be  sold  at  auction,  and  each  one  of  the  ten 
prospective  buyers  as  he  comes  to  the  market  has  his  outside 
valuation,  as  follows: 

BIO  will  bid  at  highest  20. 

B  9  "  "  "  "  25. 

B  8  "  "  "  "  30. 

B  7  "  "  "  "  35. 

B  6  "  "  "  "  40. 

B  6  "  "  "  "  45. 

B  4  "  "  "  "  48. 

B  3  "  "  "  "  50. 

B  2  "  "  "  "  53. 

B  1  "  "  "  "  60. 

When  B  3  has  bid  50  he  has  reached  his  limit  and  only  two 
other  bidders  remain.  B  2  may  then  hope  to  be  successful  at 
51,  but  B 1  "goes  one  higher"  at  each  bid  until  the  bid  of  54, 
at  which  point  B  2  drops  out.  The  price  in  an  auction  sale  is 
the  next  unit  above  the  next  to  the  highest  bidder 's  maximum 
valuation.''  When  there  are  several  urgent  bidders  for  a  sin- 
gle article,  or  for  a  number  of  articles  less  numerous  than  the 
bidders,  the  price  sometimes  goes  considerably  above  what  is 
"normal."    For  example,  if  several  farmers  in  the  neighbor- 

2  This  may  be  called  the  theoretically  exact  price,  under  the  assumed 
conditions.  Of  course  inattention,  forgotfulnoss,  etc.,  on  the  part  of  the 
bidders  alter  the  conditions  and  therefore  the  price  (both  theoretical 
and  practical). 


Ch.6] 


MONEY  AND  MAEKETS 


55 


50 

^ 

...  ^V^ 

«>-. 

40 

... 

— 

-- 

-- 

-- 

\ 

o 
(Km 

s 

§  ID 
5 

— 

... 

■- 

-- 

~ 

- 

-- 

1 

z 

3 

4- 

5„ 

B 

7 

9     9    0 

Fig.    7. 


Scale    of    Buyers 

Auction    Sale 
Article.* 


01-    Onb 


hood  have  lost  or  sold  horses  and 

a  horse  is  offered  at  auction  just 

as  the  spring  plowing  needs  to  be 

done,  they  may  bid  so  eagerly  as 

to  carry  the  price  above  that  for 

which    an    equally    good    animal 

could    be    bought    in    the    next 

county,    or    in    a    near-by    city. 

The  buyer  can  afford  to  pay  as 

much  more  as  the  cost  to  himself 

of  a  few  days'  delay  and  loss  of 

his  time  when  ''time  is  money. 

If  the  normal  price  is  60,  the  actual  price,  which  is  the  market 

price  at  that  time  and  place,  might  be  70  or  80.^ 

§  8.  Effect  of  multiplicate  units  of  supply.  Suppose  that 
instead  of  one  ax,  there  were  ten  axes,  all  of  about  the  same 
quality.  At  rural  auction  sales  in  America,  those  present  look 
over  the  articles  before  the  sale  begins,  and  try  to  find  who  has 
come  to  buy,  what  they  would  like  to  get,  and  what  they  are 
likely  to  bid.  If  every  prospective  bidder  judged  the  situa- 
tion with  entire  accuracy,  then  when  there  were  nine  axes  the 
exact  price  would  be  21,  just  enough  to  exclude  the  lowest 
bidder;  if  there  were  eight  axes  the  price  would  be  26  (and 
so  on  up  to  54  if  there  were  but  one  ax). 

What  would  happen  if  there  were  ten  axes  offered  to  ten 
bidders  and  no  one  else  would  be  tempted  to  bid  at  any  price, 
however  low  (i.e.,  complete  inelasticity  of  demand  at  prices 
below  20)  ?  The  first  thought  may  be  that  the  price  may  be 
twenty.     But  we  are  here  coming  to  the  margin  of  satisfac- 

*  Let  the  buyers  be  arranged  in  order  of  the  amount  of  their  maxi- 
mum valuations,  from  left  to  right  from  the  intersection  of  the  co- 
ordinates. The  dotted  horizontal  lines  represent  the  successive  levels 
of  the  bids,  rising  until  the  price  is  fixed  at  54,  just  above  the  next 
to  the  highest  bid. 

3  This  is  a  case  of  complementary  goods  (see  above,  Chap.  5),  the 
horse  being  needed  to  make  use  of  other  goods.  It  also  evidently  in- 
volves time-value,  which  see  later,  Part  IV. 


66 


ELEMENTS  OF  VALUE  AND  PRICE 


[Pt.I 


(0 

*»<. 

1> 

.*. 

4lv 

40 
1 

" 

■■ 

si- 

... 

"" 

"* 

"' 

. 

»v. 

" 

1 ,2<. 

?f> 

b 

... 

'■ 

^20 

L£« 

C^ 

Pia. 


9    10 
Scoie    of    tJuyers 

8.     Auction    Sale;    Numer- 
ous  Like   Abticles.* 


tion  of  desires  where  values  dis- 
appear. If  the  more  eager  bid- 
ders know  the  situation  and 
refrain  from  bidding,  each  buyer 
might  in  turn  get  an  ax  for  one 
unit,  the  smallest  possible  bid. 
This  is  the  case  when  things  sell 
for  a  "song."  On  Saturday 
nights  at  the  produce  markets 
such  goods  as  strawberries,  vege- 
tables, and  fish  will  be  sold  at 
any  price.  In  fact,  it  rarely  hap- 
pens that  demand  is  entirely  inelastic,  for  at  an  abnormally 
low  price  each  of  the  more  eager  bidders  may  be  tempted  to 
get  more  of  the  sale-goods  than  he  had  expected,  and  still 
others  who  had  no  thought  of  buying  will  do  so  if  only  with 
the  purpose  of  selling  later.  The  man  who  bought  a  cheap 
coflfin  at  an  auction  because  "it  would  be  handy  to  have  in 
the  house"  was  a  bit  of  an  extremist,  yet  it  is  proverbial  that 
anything  can  be  sold  if  the  price  is  low  enough. 

§  9.  Successive  price  levels  through  uncertainty.  It  is 
evident  that  a  mistake  in  the  judgment  of  traders  must  alter 
the  price  somewhat  with  any  number  of  sale-goods.  There 
may  be  a  succession  of  price  levels.  When  there  were  ten 
axes,  the  first  five  might  sell  at  close  to  40,  the  next  three  at 
close  to  30,  and  the  last  two  at  20;  the  more  eager  bidders 
being  uncertain  of  the  number  of  other  bidders  and  afraid  to 
risk  waiting  for  the  lower  price.     This  drop  in  price  is  a  very 

•  If  each  of  numerous  like  articles  were  put  up  for  sale  separately 
and  each  were  supposed  by  buyers  to  be  the  last,  there  would  result  a 
succession  of  prices.  Each  price  would  be  lower  than  the  preceding, 
each  just  high  enough  to  exclude  the  next  to  the  highest  remaining 
bidder.  If,  however,  it  was  known  that  there  were  several  like  articles 
but  not  just  how  many,  there  might  result  a  succession  of  price  levels. 
The  dotted  curve  connects  the  maximum  valuation  of  the  several  buy- 
ers; successive  prices  form  a  curve  somewhat  lower.  A  tenth  unit  would 
sell  only  at  a  price  between  zero  and  20. 


Ch.6]  money  and  markets  57 

common  incident  at  auctions,  to  the  chagrin  of  the  earlier 
buyers ;  but  the  opposite  is  possible,  and  bidding  may  become 
more  spirited  and  the  price  rise  as  the  last  article  is  put  up 
for  sale. 

§  10.  Auctions  with  reserve  valuations.  An  auction  is  ad- 
vertised to  be  "without  reserve"  when  everything  is  to  be 
sold  for  the  highest  bid,  no  matter  how  low  it  is.  The  seller 
agrees  in  advance  to  have  no  minimum  selling  valuation. 
Price  in  such  a  case  may  be  abnormally  low,  much  lower  than 
in  a  trade  where  a  lower  limit  is  set  by  the  ability  and  readiness 
of  each  would-be  seller  to  keep  all  or  part  of  the  supply  if  the 
price  is  not  as  high  as  his  valuations.  Buyers '  bids  alone  then 
determine  the  price  at  anything  above  zero.  In  most  cases  of 
trade,  each  trader  virtually  stands  ready  "to  bid  in"  his  own 
goods  at  his  valuations  rather  than  to  sacrifice  them ;  and  even 
in  some  auctions  the  right  is  expressly  reserved  of  withdraw- 
ing articles  for  which  the  bids  remain  unduly  low.  In  some 
cases  friends  or  confederates,  "cappers,"  make  pretended  bids, 
or  sometimes  bid  in  the  goods  if  the  price  is  too  low. 

§  11.  Origin  of  markets.  We  have  in  the  auction  sale, 
with  its  gathering  of  buyers,  something  near  to  the  idea  of  a 
market.  In  all  parts  of  the  world,  civilized  or  uncivilized,  are 
found  places  where  both  buyers  and  sellers  of  various  kinds 
of  goods  come  together  to  trade.  These  meeting  places  (or 
meetings)  were  called  markets  because  they  were  first  found 
on  the  border  (mark)  between  tribes,  villages,  or  clans,  as  a 
common  ground  where  strangers  met  to  trade.  The  notion 
of  trade  did  not  develop  within  the  family  and  the  tribe. 
There  the  idea  of  common  ownership  seems  to  have  ruled,  and 
the  communities  seem  to  have  been  led  to  trade  by  the  abun- 
dance or  the  want  of  certain  natural  resources  in  their  en- 
vironment; thus  shore  tribes  had  a  surplus  of  salt  and  fish, 
forest  tribes  had  meat  and  skins,  tribes  living  near  good  min- 
eral deposits  had  flints  and  bronze,  while  each  wanted  what 
the  other  had.  Llarkets  developed  on  neutral  ground  whither 
came  buyers  and  sellers,  some  of  whom  became  regular  mer- 


68  ELEMENTS  OF  VALUE  AND  PRICE       [Pt.  I 

chants.  Buyers  found  a  better  selection  of  goods,  both  as  to 
kind  and  as  to  quality,  and  merchants  found  many  would-be 
purchasers  for  what  they  had  to  sell.  Throughout  the  Middle 
Ages  purchases  were  made  by  the  more  prosperous  husband- 
men in  great  quantities  once  or  twice  a  year  at  the  fairs  or 
markets.  As  both  buyers  and  sellers  came  from  widely  sep- 
arated places,  the  feature  of  combination  (or  monopoly)  was 
not  common  and  the  conditions  of  a  competitive  market  were 
present. 

In  America  as  towns  or  villages  appeared  where  some  men 
could  give  most  of  their  time  to  producing  something  besides 
food,  local  markets  sprang  up  whither  farmers  came  to  ex- 
change with  village  artisans.  Every  little  country  store  in 
America  is  in  some  measure  a  market,  where  the  merchant 
trades  with  the  farmer,  the  townpeople  with  the  merchant,  and 
neighbors  with  each  other.  The  larger  cities  become  the  great 
markets,  toward  which  are  sent  all  the  surplus  products  of 
farms  and  of  the  mills  in  smaller  cities  to  be  distributed  to 
the  consumers. 

§  12.  Transportation  and  the  extent  of  markets.  Markets 
are  limited  by  the  means  of  transportation  enabling  goods  to 
be  brought  from  the  place  of  their  origin  and  delivered  to  the 
place  of  their  use.  A  dense  population  engaged  mainly  in 
commerce  and  manufactures  can  be  maintained  only  at  points 
where  there  are  means  of  bringing  in  a  large  supply  of  food, 
and  of  carrying  back  manufactured  goods.  The  remarkable 
growth  in  the  means  of  commerce  since  the  application  of 
steam  to  water  traffic,  and  the  invention  of  the  railroad,  have 
made  it  possible  for  goods  to  be  gathered  from  more  distant 
points. 

§  13.  Communication  and  markets.  Buyers  and  sellers 
need  not  be  physically  present  at  one  place,  but  they  must  be 
in  communication,  so  that  there  can  be  a  common  understand- 
ing between  them.  In  earlier  times,  however,  there  were  no 
easy  means  of  gatherincc  information  such  as  trade  bulletins, 
newspapers,  special  commercial  agencies,  and  no  rapid  means 


Ch.  6]  MONEY  AND  MARKETS  69 

of  transmitting  intelligence,  such  as  the  steamship,  the  rail- 
road, the  postal  service,  the  land  telegraph,  the  ocean  cable, 
and  the  wireless  telegraph.  The  traders  once  had  to  be  to- 
gether at  one  place  in  order  that  each  should  know  what  the 
others  were  willing  to  do.  All  this  is  now  changed  and  for 
many  purposes  men  in  Paris,  in  New  York,  in  London,  and  in 
Calcutta  are  separated  by  only  a  few  moments  for  trading. 

As  a  result  of  these  changes,  the  old  periodical  fairs  and 
markets  have  almost  disappeared,  and  there  has  been  a  widen- 
ing of  the  village-market  to  the  markets. of  the  province,  of 
the  nation,  and  finally  of  the  world.  While  a  part  of  every 
one's  purchases  continues  to  be  made  in  the  neighborhood,  a 
greater  and  greater  portion  of  the  total  business  is  done  by 
traders  that  are  widely  separated  and  that  are  members  of  a 
world-market.  Various  products  produced  in  the  same  locality 
may  seek  different  markets.  While  the  market  for  fruit  and 
eggs  may  be  in  the  village  near  the  farmhouse,  that  for  most 
of  the  wheat  of  the  same  farm  may  be  in  Liverpool. 

§  14.  One  price  in  a  market.  If  the  many  buyers  and 
sellers  coming  together  at  a  market-place  were  to  meet  as 
isolated  couples,  without  knowledge  of  the  others,  the  trades 
would  be  made  at  a  great  variety  of  ratios,  possibly  no  two 
trades  at  the  same.  But  the  coming  together  of  buyers  and 
sellers  into  a  single  trading  group  has  a  remarkable  effect  on 
the  ratio  at  which  the  trades  take  place  between  individual 
buyers  and  sellers.  So  far  as  there  is  truly  a  meeting  of 
minds,  all  the  trades  taking  place  at  any  one  time  are  at  the 
same  ratio.  It  is  the  essential  proof  of  a  true  market  that 
there  is  but  one  price  at  any  moment.  A  complete  or  typical 
market  may  therefore  be  defined  as  a  group  of  closely  com- 
municating traders  whose  valuations,  however  diverse  before 
they  meet,  unite  for  a  moment  into  a  single  price  (as  regards 
the  goods  actually  traded).  A  typical  market  exists  and  a 
market  price  results  when  there  is:  (a)  a  group  of  buyers  and 
sellers;  (b)  a  judgment  by  each  trader  of  both  gi'onps,  as  to 
the  conditions  of  the  market;  (c)  free  bidding  on  both  sides. 


80  ELEMENTS  OP  VALUE  AND  PKICE  [Pt.  I 

§  15.  Imperfect  market  conditions.  When,  however,  these 
conditions  are  not  fulfilled  perfectly,  different  prices  may  exist 
at  the  same  moment  near  each  other.  Retail  and  wholesale 
merchants  may  be  purchasing  goods  in  the  same  room  at  the 
same  time  at  very  different  prices,  but  there  are  here  two  dis- 
tinct and  well  recognized  markets.  Even  within  what  is  ordi- 
narily the  same  market,  differences  may  for  brief  times  exist. 
On  the  occasion  of  a  break  in  stocks,  excited  traders  within  ten 
feet  of  each  other  make  bids  that  differ  by  thousands  of  dol- 
lars; but  the  expression  used  to  describe  this  explains  the 
cause:  "the  market  has  all  gone  to  pieces."  The  very  essence 
of  the  idea  of  market  is  the  meeting  of  minds  in  agreement 
on  a  price.  Within  a  group  of  buyers  and  sellers  thus  meet- 
ing, one  price  prevails  at  least  for  the  moment.  The  more 
nearly  the  actual  conditions  approach  to  the  ideal  of  a  market, 
the  less  are  prices  fixed  by  individual  higgling,  and  the  more 
impersonal  they  become,  the  buyers  and  sellers  being  compelled 
to  adjust  their  bids  to  the  needs  of  the  market,  and  being  un- 
able to  vary  them  greatly  one  way  or  the  other. 


I 


CHAPTER  7 
PRINCIPLES  OF  PRICE 

§  1.  Buyers'  composite  valuation  curve.  §  2.  Sellers'  composite  valu- 
ation curve.  §  3.  Price  the  resultant  of  demand  and  supply.  §  4.  The 
market  as  a  two-sided  auction.  §  5.  Supply  and  demand  coordinate  in 
price-determination.  §  6.  Price  in  a  permanent  market.  §  7.  Effect  of 
the  market  upon  valuations.  §  8.  The  point  of  price-adjustment.  §  9. 
Social  factors  in  individual  valuations.  §  10.  Objective  conditions  to  be 
studied. 

§  1.  Buyers*  composite  valuation  curve.  We  have  now  to 
examine  the  process  by  which  market-price  is  determined  where 
two  groups  of  bidders  are  present.  This  fulfils  the  conditions 
of  a  complete  market,  where  there  is  two-sided,  competitive 
bidding.  Each  trader  comes  to  the  market  with  valuations  al- 
ready in  his  mind  more  or  less  definitely.  It  may  be  that  he 
is  disposed  to  buy  one  unit  if  the  price  is  high ;  ^  if  it  is  lower 
he  will  buy  two  units ;  if  still  lower,  three  units,  etc.  Or  he  is 
disposed  to  sell  one  unit  at  a  certain  price,  two  units  if  the 
price  offered  is  higher,  three  if  it  is  still  higher,  etc.  The 
situation  from  the  standpoint  of  the  prospective  buyers  is 
represented  in  Figure  9.  One  of  them  (B  1)  stands  ready 
to  purchase  one  unit  at  a  price  as  high  as  14  if  he  can 
do  no  better,  but  he  will,  of  course,  buy  at  a  lower  figure  if 
possible.  B  2  will,  if  he  must,  pay  as  high  as  13  for  a  unit. 
Other  buyers^  are  willing  to  buy  (one  unit  each)  at  prices 

1  This  sot  of  valuations  with  which  a  trader  enters  a  market  reflects 
a  disposition,  an  attitude  of  choice,  a  provisional  judgment,  which  is 
subject  to  change  with  new  conditions.  See  below  on  social  factors  in 
individual  valuations. 

2  Elasticity  of  demand.  The  changes  of  demand  (and  of  supply) 
relative  to  a  certain  amount  of  change  of  price  are  very  different  ac- 

ei 


ea 


ELEMENTS  OF  VALUE  AND  PRICE 


[Pt.  I 


respectively  lower-12,  11,  etc.  At  the  extreme  end  of  the 
scale  there  are  certain  individuals  who  would  be  induced  to 
buy  only  by  a  price  extremely  low— 4,  3, 1,  etc.    The  diagram, 


.     3      -f^5      6     7      6     9     10    11     12   13    14  15    16 

Successive  Buyers  and   5ale  Goods 
rio.  9.    Buyers'  Composite  Valuation  Citbvb. 
therefore,  represents  this  situation  where  the  individual  (pros- 
pective) buyers  have  different  mental  attitudes  (valuations)  as 

cording  to  kinds  of  goods,  to  times,  and  to  circumstances.  A  fall  of  a 
particular  price  by  1  per  cent  may  correspond  with  an  increase  of 
demand  by  1  per  cent  or  2  per  cent  or  10  per  cent  as  the  case  may 
be.  When  eggs  were  35  cents  a  dozen  in  Chicago  (between  1909-1911) 
and  fell  to  34  cents  the  change  in  demand  was  hardly  noticeable.  But  at 
30  cents  (about  15  per  cent  less)  the  demand  rose  from  about  15,000 
cases  to  30,000  a  week  (100  per  cent), — a  considerable  degree  of  elastic- 
ity. (The  standard  case  contains  30  dozen.)  At  20  cents  a  dozen  de- 
mand was  remarkably  elastic,  and  additional  supplies  to  the  amount  of 
60,000  to  100,000  cases  were  taken  (probably  used  as  substitutes  for 
meat,  and  to  put  into  cold-storage)  with  hardly  noticeable  decline  in 
price.  Later,  in  June  and  July,  however,  when  the  demand  for  cold- 
storage  purposes  falls  off,  and  possibly  because  eggs  are  somewhat  less 
palatable  in  hot  weather,  the  price  fell  lower  (to  IS,  and  one  year  even 
to  15  cents).     When  at  a  given  price  a  small  reduction  in  price  in- 


Ch.7] 


PRINCIPLES  OF  PRICE 


63 


regards  the  good  in  question,  and  where  in  the  aggregate  the 
whole  body  of  buyers  stand  ready  to  take  the  various  amounts 
indicated,  according  as  the  prevailing  price  is  higher  or  lower. 
If  it  is  high  they  will  take  a  relatively  small  quantity :  if  it  is 


12     5     4      5     6     V     S      9     lO    IX    IE    15    14    15    16 

Successive    Sellers    and    Sole    Goods 
Fia.  10.     Sellers'  Composite  Valuation  Cuevb. 

low  they  will  take  a  larger  amount.  If,  for  example,  the  price 
should  prove  to  be  12,  it  will  be  seen  that  only  four  units  will 
be  taken  by  the  would-be  purchasers.  They  will  be  secured, 
of  course,  by  the  7nost  urgent  buyers,  B  1,  B  2,  B  3,  and  B  4.. 
There  is  no  one  else  who  stands  ready  to  buy  at  a  price  as  high 
as  12.  There  are  others  who  would  buy  at  a  lower  figure,  but 
if  the  ruling  market  price  is  as  high  as  12  they  are,  by  their 
own  attitude  of  choice,  necessarily  excluded  from  the  actual 
market  transactions.     Similarly  for  any  other  price  in  the 

creases  largely  the  amount  that  will  be  bought  and  sold,  demand  and 
supply  are  said  to  be  elastic.  For  example,  at  35  cents  the  demand 
for  eggs  in  Chicago  is  relatively  inelastic,  and  at  20  cents  it  is  very 
elastic.  See  Fetter,  Source  Book  in  Economics,  pp.  25-33,  for  descrip- 
tion and  diagrams  of  some  seasonal  price  variations  in  food,  from 
Professor  H.  C.  Taylor's  study  of  the  subject. 


64  ELEMENTS  OF  VALUE  AND  PRICE  [Pt.  I 

scale  there  will  be  a  definite  number  of  included  or  actual  buy- 
ers, and  a  definite  amount  of  the  good  which  in  the  aggregate 
will  be  taken  by  those  buyers  at  that  price.  This  amount,  the 
demand,  which  the  buyers  will  take  at  any  specified  price  is  a 
composite,  the  combined  result,  of  course,  of  the  bids  of  the 
various  individuals  concerned. 

§  2.  Sellers'  composite  valuation  curve.  We  may  show  in 
a  similar  way  by  Figure  10  the  conditions  of  supply.  S  1,  the 
most  urgent  seller,  is  willing  to  sell  one  unit  at  a  price  as  low 
as  4;  ^  S  7  will  part  with  a  unit  at  a  price  of  7.5  if  he  can  do 
no  better ;  S  12  will  not  be  tempted  to  sell  unless  he  can  get  10 
for  a  unit  of  the  good,  etc.  Here  again  the  diagram  simply 
depicts  the  fact  that  at  any  given  price  there  will  be  a  certain 
number  of  actual  or  included  sellers,  and  the  amount  offered 
by  those  sellers  at  that  price,  or  the  supply,  will  also  be  a 
definite  quantity.  At  a  low  price  this  quantity  is  small ;  at  a 
high  price  it  is  large. 

§  3.  Price  the  resultant  of  demand  and  supply.  Our 
question  now  is  what  is  the  market-price  which  naturally 
emerges  from  the  demand-  and  supply-conditions  which  we 
have  been  considering.  If  one  of  these  curves  be  superimposed 
upon  the  other,  they  are  seen  to  cross  at  the  point  correspond- 
ing to  ten  units  of  sale-goods,  and  to  the  price  of  nine  per 
unit.    All  that  the  diagram  means  is  that  under  the  supposed 

3  It  must  not  be  thought  that  in  the  above  diagrams  B  1,  B  2,  B  3, 
etc.,  are  necessarily  all  difTerent  people.  B  1,  who  is  willing  to  pay 
(if  he  must)  14  for  one  unit,  may  appear  again  as  B  2,  willing  to  buy 
a  second  unit,  but  not  willing  to  pay  as  much  for  it  as  he  would 
for  a  single  unit,  or  as  B  4,  B  6,  etc.  That  is,  he  is  willing,  like  the 
other  buyers  individually,  and  like  the  group  of  buyers  as  a  whole,  to 
take  a  certain  sum  at  a  high  price,  and  a  larger  sum  at  a  lower  price. 
This  is  in  accordance  with  tlie  principle  of  diminishing  gratification 
which  we  have  already  discussed  (ch.  4).  Similarly  SI  may  enter 
again  as  S  2,  S  5,  S  6,  etc.  That  is  to  say,  each  seller  (of  divisible 
amounts  of  goods)  is  willing  to  offer  more  at  a  high  price  than  at  a 
low  price.  It  is  evident,  then,  that  the  principle  of  diminishing 
gratification  lies  at  the  bottom  of  the  demand  conditions  and  also  of 
the  supply  conditions  as  they  exist  in  a  market  at  any  given  time. 


CH.7] 


PRINCIPLES  OF  PRICE 


65 


conditions  of  demand  and  supply  (i.e.,  ten  units  offered  by 
the  sellers,  and  ten  asked  by  the  buyers  at  the  same  price,  9), 
the  market-price  which  actually  prevails  will  be  the  price  (9) 
at  which  the  demand  and  supply  are  equal.     It  is  obvious  that 


16 

15 
14 
IS 
IE 

11 

Ss 

is 

3 
4 
5 

2 
1 


-*-<t-|--i--'-  ■ 


_l  _, 


1   z   s 


Fia.   11. 


A-    9    6    7    6    9    10  11  12  13  14  19  16 

Units  of   5ale-gooct3 
Peice  Resulting  from  Valuations. 


the  number  of  units  bought  must  be  the  same  as  the  number 
sold.  At  the  price  9,  there  can  be  and  will  be  ten  trades.  In 
each  of  these  ten  trades  there  is  some  gain  for  each  buyer  and 
for  each  seller.  (It  matters  not  whether  the  most  urgent  buyer 
buys  from  the  most  urgent  seller.)  But  not  one  of  the  buyers 
with  a  valuation  less  than  9  could  trade  with  any  of  the 
sellers  with  a  valuation  more  than  9.  The  only  way  in  which 
any  one  of  these  excluded  buyers  or  sellers  could  get  into  the 
trading  would  be  by  inducing  some  one  on  the  other  side  to 
act  by  mistake  contrary  to  his  own  interest,  or  from  motives 
of  pity  or  generosity,  while  at  the  same  time  one  on  the  same 
side  fails  to  act  in  accord  with  his  own  interest.* 

*  Effect  of  trading  outside  of  the  market.  For  example,  B  11  might 
take  S  8  apart  and  persuade  him  to  exchange  at  the  price  8,  at  which 
both,  would  gain  something  as  compared  with  not  trading  at  all.  But 
it  would  be  folly  for  S  8  to  isolate  himself  in  effect  from  the  market 


66  ELEMENTS  OF  VALUE  AND  PRICE  [Pt.  I 

It  appears  then  that  a  logical  market-price  ^  is  that  price 
common  to  all  trades  made  at  the  time,  which  permits  the 
maximum  number  of  transfers  with  some  gain  to  both  parties. 
This  may  be  expressed  also  as :  that  price  common  to  all  trades 
at  a  given  moment,  at  which  no  less  urgent  bidder  on  either 
side  of  the  market  can  trade  while  any  more  urgent  bidder  is 
excluded.  Such  a  price  brings  the  desires  underlying  demand 
and  supply  to  an  equilibrium;  no  buyer  is  willing  to  bid 
more  and  no  seller  is  willing  to  take  less.  It  may  therefore 
be  called  an  equilibrium  price. 

§  4.  The  market  as  a  two-sided  auction.  It  may  be  help- 
ful to  think  of  the  market  as  a  double  auction-sale  in  which 
each  bidder  in  either  group  has  in  mind  a  "reserve-price," 
a  valuation  at  which  he  will  withdraw  from  the  market.    Now 

in  this  way.  For  at  that  price  there  would  be  8  traders  willing  to 
sell  and  11  willing  to  buy.  Three  buyers  able  to  outbid  B  11  must, 
at  the  price  8,  fail  to  get  into  the  trade  at  all.  One  of  them  (logically 
it  should  be  B  10  with  a  bid  of  9)  must  leave  the  market  without 
making  a  purchase  (S  10  having  a  valuation  of  9.5).  Any  buyer 
from  B  1 1  to  B  16  therefore  could  succeed  in  getting  into  the  market 
only  as  a  result  of  persuading  one  of  the  sellers  against  his  own 
interest,  and  of  outwitting  a  competing  buyer.  Similarly,  S  11  might 
get  B  9  apart  ( or  any  other  buyer  from  B  1  to  B  8 )  and  make  a 
trade  at  9.5  mutually  advantageous  (tho  not  so  good  for  B  9  as  he 
might  get  otherwise).  But  at  this  price  there  would  be  11  sellers  and 
but  9  buyers,  and  as  in  the  converse  case,  the  less  urgent  traders  would 
be  displacing  more  urgent  traders.  Under  the  assumed  valuations  any 
other  price  than  9  involves  the  displacing  of  some  more  urgent  bidder 
(or  bidders)   by  a  less  urgent  bidder  on  the  same  side. 

8  This  is  the  logical,  or  theoretical,  market-price  in  the  sense  that  it 
is  the  price  which  results  when  all  the  assumed  conditions  are  fulfilled. 
Actual  market-price  is  that  price  at  which  a  trade  is  made,  and  this 
may  vary  on  either  side  of  the  theoretical  price  when  something  hap- 
pens such  as  is  described  in  the  last  footnote,  some  one  failing  to  realize 
his  possibilities.  When  this  occurs  there  is  immediately  a  new  theo- 
retical price  and  tlie  increase  of  bids  from  the  excluded,  more  urgent 
bidders  must  send  the  price  either  higher  or  lower  than  at  the  last 
trade.  In  the  example  above,  where  8  was  the  actual  price  on  one 
trade,  the  next  theoretical  price  became  Qy^. 


Ch.  7]  PRINCIPLES  OF  PRICE  61 

suppose  it  is  the  duty  of  the  auctioneer  to  find  the  correct 
market-price.  He  would  say,  "There  are  16  axes  here,  how 
many  will  sell  at  7  rather  than  not  sell  at  all?"  At  this 
price  there  would  be  six  sellers  and  only  six  trades  possible. 
The  other  owners  of  axes  hold  them  (have  reserve-valuations) 
at  more  than  price  7.  ''How  many  will  buy?"  At  this 
price  there  are  sixteen  would-be  buyers.  Then  by  successive 
readjustments  the  auctioneer  might  finally  fix  a  price  at 
which  the  maximum  number  of  trades  is  possible,  that  is,  the 
price  9,  with  ten  trades. 

§  5.  Supply  and  demand  coordinate  in  price-determina- 
tion. It  should  be  emphasized  that  in  the  foregoing  ex- 
planation of  price,  choice  must  be  understood  in  relation 
both  to  demand  and  to  supply.  Choice  is  not  peculiarly 
connected  with  demand.  Demand,  like  supply,  means  a 
quantity  of  goods  which  a  person  chooses  to  trade  at  a  spec- 
ified price.  Demand  is  expressed  as  the  number  of  sale- 
goods  which  a  buyer  will  take  at  the  price;  supply  as  the 
number  of  sale-goods  with  which  a  seller  ^  will  part.  Demand 
and  supply  are  the  same  goods  viewed  in  different  aspects. 
A  trader  can  have  no  demand  unless  he  has  a  supply  of  the 
price-goods  to  give,  and  will  make  no  offer  unless  he  has  a 
desire  for  the  other  goods.  There  is  no  more  of  the  psy- 
chological element  in  demand  than  in  supply,  and  no  less  of 
the  objective  elements  (of  material  goods). 

§  6.  Price  in  a  permanent  market.  We  have  been 
analyzing  the  process  of  price-fixing,  starting  at  a  moment 
when  no  price  existed.  Prices  must  have  their  origin  in  this 
way  beginning  in  a  given  situation  of  human  desires  in  re- 
lation to  the  existing  fund  of  goods.  But  in  a  much  greater 
number  of  cases  in  practical  life  to-day,  price  seems  to  ex- 
ist in  advance  of,  and  apart  from,  any  individual's  valua- 
tions. Almost  every  market,  like  every  active  business,  is  a 
"going  concern,"  closed  only  at  night,  on  Sundaj^s,  and  on 

8  Who  is  also,  from  the  other  point  of  view,  a  buyer,  his  sale-goods 
being  the  price  he  is  ready  to  pay. 


68  ELEMENTS  OF  VALUE  AND  PRICE  [Pt.  I 

holidays.  Price  seems  to  be  a  continuous  fact,  altho  there 
is,  properly  speaking,  no  continuous  price;  there  is  merely 
a  succession  of  separate  prices,  as  shown  by  the  trades  from 
moment  to  moment.  We  watch  price  change  as  in  a  moving 
picture  made  up  of  many  instantaneous  photographs.  Yet 
each  new  price  seems  to  grow  out  of  the  last  price.  The 
opening  price  each  day  is  usually  somewhere  near  the  closing 
price  of  the  day  before,  but  often  somewhat,  or  very,  different 
as  a  result  of  rumors,  or  of  information  regarding  rains, 
wars,  fires,  and  countless  other  influences.  The  individual 
trader  must  take  the  price  at  any  moment  as  he  finds  it.  His 
choice,  indeed,  is  such  a  small  element  that  price  seems  to  be 
independent  of  his  valuation.  Pie  merely  decides  whether  at 
that  price  to  buy,  or  to  sell,  the  same  amount  as  before,  or 
more  or  less,  or  none  at  all,  or  to  bid  or  to  ask  a  lower  or  a 
higher  sum.  In  doing  any  of  these  things,  however,  he  not 
only  indicates  his  attitude  toward  the  market-price,  but  he 
exercises  his  influence  upon  it.  An  excluded  buyer,  if  he 
has  anything  to  trade,  shows  that  he  values  the  price  more 
than  he  does  the  sale-good.  On  the  other  hand,  an  ex- 
cluded seller,  the  owner  of  a  sale-good,  retains  it  because  his 
desire  for  it  is  stronger  than  his  desire  for  the  price  (and  for 
the  other  things  which  by  trade  the  price  represents  to  him). 
Trade  and  the  succession  of  prices  appearing  are  the  index 
and  the  resultant  of  the  continuous  changes  in  the  economic 
conditions,  desires,  and  choices  of  the  members  of  the  com- 
munity. 

§  7.  Effect  of  the  market  upon  valuations.  It  is  clear 
that  price  is  the  result  of  the  valuations  of  traders  in  a  mar- 
ket taken  collectively;  yet  as  each  individual's  valuation  is 
looked  at  separately  it  seems  to  be  largely  determined  by 
price.  It  is  very  important  to  keep  in  mind  that  the  valua- 
tions which  are  spoken  of  and  represented  graphically  as  so 
different  from  the  market-price,  are  not  actual.  They  are 
merely  what  would  be  if  the  individual  were  not  in  the  market. 
It  was  shown  in  discussing  the  valuation  curve  (see  Chapter  4, 


Ch.  7]  PRINCIPLES  OF  PRICE  69 

sections  8-11),  of  an  isolated  person,  that  the  higher  valuations 
of  earlier  units  sink  in  accordance  with  the  principle  of  dimin- 
ishing gratification  when  more  like  units  are  added.  The  actual 
valuations  of  all  the  like  units  of  a  present  supply  are  all 
alike  (principle  of  indifference).  Now  in  a  market  the  in- 
dividual is  in  the  presence  of  large  new  supplies  which  he 
can  buy  at  a  price.  If  he  approached  the  market  with  a 
higher  valuation  of  the  sale-good  (in  terms  of  the  price- 
good)  than  he  finds  prevailing,  he  buys,  and  continues  to 
buy  successive  units  until  his  valuation  of  the  sale-good  has 
sunk  to  the  market-price,  or  until  his  price-goods  (purchasing 
power)  are  exhausted.  So  long  as  he  keeps  on  buying  he  is 
bringing  his  valuation  as  nearly  into  agreement  with  the 
market-price  as  he  can  (with  units  of  the  size  offered).  As 
he  gets  more  sale-goods  their  value  (in  money)  falls  (principle 
of  diminishing  gratification)  ;  as  his  money  decreases  the 
value  of  the  other  things  he  can  buy  with  it  relatively  in- 
creases (principle  of  increasing  gratification).  When  all  his 
money  is  gone  he  has  desire,  but  no  demand,  his  valuation 
is  merely  hypothetical — what  he  thinks  he  would  pay  if  he 
had  the  money.  This  is  the  state  of  mind  of  a  large  part  of 
the  population  most  of  the  time  regarding  most  kinds  of 
goods. 

§  8,  The  point  of  price-adjustment.  Picture  now  a  mar- 
ket, let  us  say  a  village,  to  which  the  farmers  of  the  sur- 
rounding country  are  bringing  eggs,  butter,  apples,  etc.  The 
price  of  eggs  to-day  is  20  cents  a  dozen,  and  at  that  price 
just  100  dozen  are  brought  to  market  and  sold.  If  but  80 
dozen  a  day  come  to  market  the  price  will  rise,  let  us  say, 
to  25  cents.  Altogether  there  must  be  20  dozen  fewer  bought. 
Who  ceases  to  demand  eggs  because  price  has  risen  only  five 
cents  a  dozen?  Some  few  wealthier  families  may  continue 
to  buy  the  same  number  as  before,  a  few  poorer  families  will 
stop  using  eggs  entirely,  and  between  these  two  extremes  will 
be  many  families  which  will  use  eggs  a  little  more  sparingly. 
Now  the  group  of  poorest  families,  which  before  was  buy- 


70  ELEMENTS  OF  VALUE  AND  PRICE  [Pt.I 

ing  some  eggs,  was  just  at  the  margin  of  choice  as  regards  its 
whole  demand;  the  middle  group  was  just  at  the  margin  as 
regards  a  certain  part  of  its  demand.  In  the  contrary  case, 
say  a  fall  of  price  from  20  to  18  cents,  many  of  the  families 
will  somewhat  increase  their  use  of  eggs  (substituting  them 
for  other  kinds  of  food  and  packing  them  for  winter  use), 
and  perhaps  still  other  families,  which  could  before  not  af- 
ford to  use  eggs,  will  now  buy  some.  And  so  with  respect 
to  every  good,  in  a  market  of  any  size,  there  are  always 
persons  already  buying  some,  who  will  be  ready  to  buy  more, 
and  there  are  others  not  now  buying  any,  who  will  begin  to 
buy  some,  at  a  lower  price.  At  the  higher  price  they  are 
excluded  would-be  buyers;  in  respect  to  certain  quantities, 
they  are  merely  potential  buyers,  but  when  the  price  falls 
they  become  actual  buyers.  (A  similar  view  must  be  taken 
of  the  sellers,  actual  and  potential,  at  a  certain  price.) 
Each  price  is  clearly  the  resultant  of  all  the  actual  demand 
and  all  the  actual  supply  that  brings  about  the  equilibrium; 
but  certain  units  both  of  demand  and  of  supply  are  more 
responsive  to  price  changes  and  are  more  immediately  the 
occasion  in  bringing  about  changes  than  are  others.  The  neces- 
sary adjustments  of  price,  of  demand,  and  of  supply,  are  made 
by  those  traders  who  are  in  a  most  sensitive,  unstable  con- 
dition in  reference  to  certain  units  of  goods.  Therefore  our 
attention  in  studying  price  is  directed  more  toward  the  buyers 
and  the  sellers  who  are  just  excluded,  or  are  about  to  be  ex- 
cluded with  any  alteration  of  the  conditions  in  the  market. 
When  the  two  pans  of  a  balance  are  nearly  in  equilibrium, 
either  a  bit  taken  out  of  one  pan  or  a  bit  added  to  the  other 
will  bring  the  balance  to  equilibrium.  We  speak  of  these 
bits  added  or  taken  away  as  causing  the  equilibrium,  but 
we  know  that  this  is  only  on  condition  that  the  other  con- 
tents of  the  pan  are  present  and  remain  unchanged  while 
this  one  change  is  made. 

§  9.    Social  factors  in  individual  valuations.    IMen  of  to-day 
are  accustomed  to  look  to  the  market-price  as  in  some  measure 


Ch.  7]  PRINCIPLES  OF  PRICE  71 

a  guide  to  their  valuations.  We  have  just  seen  why  this 
must  be  so,  because  by  trade  men  are  constantly  bringing 
their  valuations  into  accord  with  that  represented  in  price 
(so  far  as  they  have  the  purchasing  power) .  But  in  still  other 
ways,  outside  of  trade  and  often  preceding  the  actual  trade, 
the  influence  of  other  men's  choices  comes  to  play  a  large 
part  in  our  valuations.  Traditional  and  conventional  values, 
foolish  fashions,  fads,  and  imitation  of  others  in  very  dif- 
ferent walks  of  life  and  with  very  different  needs,  modify  and 
determine  our  choices.  It  is  easy  to  see  this  in  every  one 
but  one's  self.  These  phenomena  are  variously  spoken  of 
as  the  mob-mind,  the  hypnotism  of  the  crowd,  suggestion, 
snobbery,  social  ambition,  idealism,  etc.  Each  of  us  is  so 
affected  by  his  surroundings,  his  associates,  his  education  from 
youth  up,  that  even  what  seem  to  be  our  coldest  calculations 
are  based  on  these  more  or  less  fixed  and  fundamental 
standards  of  opinion,  prejudice,  and  preference.  Neverthe- 
less, the  individual's  choice,  when  he  makes  it,  is  his  choice 
and  helps  to  maintain  or  alter  price.  It  will  be  recalled  that 
from  its  very  beginning  choice  was  impulsive,  not  rational, 
and  continues  to  be  in  a  large  part  guided  by  habit  as  well 
as  by  impulse.  Choice  has  become  in  part  rational  only  as 
primitive  impulses  have  been  inhibited,  and  choice,  which  is 
action,  has  been  postponed  in  view  of  larger  interests. 

§  10.  Objective  conditions  to  be  studied.  In  the  fore- 
going analysis  there  is  not  an  ultimate  explanation  of  price ;® 
we  must  not  think  that  price  is  fixed  by  choice  rather  than  by 
the  objective  conditions  affecting  abundance  of  supply,  etc. 
There  is  no  such  contrast  between  alternative  explanations. 
Each  choice  is  made  in  a  given  situation ;  so  far  as  the  choice 

6  It  is  easy  "to  confuse  the  idea  of  natural  cause  with  that  of  final 
cause.  Science  knows  nothing  of  the  latter;  any  natural  cause  is 
only  a  link  in  the  chain  of  cause  and  effect;  it  is  itself  the  result  of 
antecedent  causes  and  the  cause  of  subsequent  results."  Conklin, 
"Heredity  and  Environment,"  p.  164.  This  warning  of  the  natural 
scientist  is  just  as  important  in  the  social  sciences  as  it  is  in  biology. 


72  ELEMENTS  OF  VALUE  AND  PRICE       [Px.  I 

is  deliberate  it  is  made  in  view  of  all  the  conditions,  which  in- 
clude the  abundance  and  scarcity  of  material  things.  It  is 
impossible  to  conceive  of  choice  determining  price  without 
having  regard  to  the  quantities  and  qualities  of  economic 
goods.  In  choice,  men  are  at  nearly  all  times  touching  the 
world  of  reality.  In  price,  we  see  a  most  significant  meeting 
point  of  economic  forces.  The  market-price  of  the  moment 
contains  within  itself  many  other  problems  the  solution  of 
which  must  be  sought  in  a  study  of  natural  resources,  inven- 
tions, machinery,  growth  of  population,  ability  of  men  to 
produce,  and  many  other  concrete  conditions  of  industry. 


CHAPTER  8 
COMPETITION  AND  MONOPOLY 

§  1.  Competition  defined.  §  2.  Naturalness  of  competition.  §  3.  Con- 
flicting interests  of  competition.  §  4.  Nature  of  monopoly.  §  5.  Mo- 
nopoly not  merely  scarcity.  §  6.  Monopoly  not  merely  superior  economic 
power.  §  7.  Partial  competition  coexisting  with  monopoly.  §  8.  Abso- 
lute and  relative  monopoly.  §  9.  Motives  and  germs  of  monopoly.  §  10. 
Types  of  monopoly-price:  receipts  vs.  profits.  §  11.  Uniform  monopoly- 
price.  §  12.  Uniform  monopoly-price:  inelastic  demand.  §  13,  Uniform 
monopoly-price:  elastic  demand.  §  14.  Discriminatory  monopolistic 
price. 

§  1.  Competition  defined.  The  word  competition  is  fre- 
quently heard  and  with  various  implications.  Literally  it 
means  "seeking-together,"  with  the  suggestion  of  rivalry,  of 
mutual  exclusion  of  the  seekers.  As  applied  to  trade,  compe- 
tition means  the  attempt  of  two  or  more  persons  to  get  the 
same  thing,  each  being  guided  by  his  own  valuation  and  not 
restrained  by  any  outside  force.  Thus  there  is  an  element  of 
competition  in  the  simplest  case  of  barter,  for  whatever  ratio 
is  more  favorable  to  one  is  less  favorable  to  the  other  party 
and  gives  to  one  what  the  other  fails  to  get.  But  the  idea  of 
competition  more  frequently  is  applied  to  a  group  of  traders 
buying  or  selling  the  same  class  of  goods.  All  the  members  of 
the  group  are  thought  of  as  being  on  one  side  of  the  trade, 
either  the  buyer's  or  the  seller's  side.  If  in  such  case  there 
is  on  the  other  side  but  one  trader  (or  some  agreement  or  lim- 
itation of  competition)  there  is  one-sided  competition.  When 
there  are  two  groups  of  competitive  traders,  one  of  buyers  and 
one  of  sellers,  there  is  two-sided  competition. 

§  2,    Naturalness  of  competition.    Competition  has  been 

73 


74  ELEMENTS  OF  VALUE  AND  PRICE  [Pt.  I 

implied  in  previous  chapters  in  such  words  as  rivalry,  emula- 
tion, bidding,  least  eager  buyer,  or  seller,  price-adjustment,  etc. 
Competition  is  spoken  of  as  a  force  raising  or  lowering  prices, 
as  a  motive  acting  upon  the  traders,  etc.,  but  competition  is 
not  a  different  force,  or  a  separate  motive,  apart  from  the 
desires  of  the  traders.  (Some  minor  exceptions  occur  where 
the  motive  is  the  mere  wish  to  outdo  for  the  fun  of  the  game.) 
Bather  competition  ordinarily  is  but  an  expression  for  the  sit- 
uation where  each  trader  is  exercising  his  choice  in  a  market 
without  restraint  from  others  of  the  same  group.  For  unless 
there  is  introduced  a  new  personal  factor  of  collusion,  con- 
spiracy, agreement  not  to  bid  against  each  other,  the  market 
price  will  be  competitive,  and  a  condition  of  competition  exist. 
Such  agreements,  being  dependent  always  on  the  good  faith 
of  the  parties,  often  also  on  secrecy,  and  being  provocative  of 
jealousies  in  the  division  of  the  gains,  are  dependent  on  per- 
sonal factors,  and  create  a  more  artificial  state  of  price  than 
is  found  in  competitive  price,  which  has  a  more  impersonal 
character.  Hence  competitive  prices  have,  since  the  days  of 
Adam  Smith,  commonly  been  spoken  of  as  ''natural"  prices. 
The  word  natural  must,  however,  be  used  with  caution.  It 
can  not  be  said  that  the  choice  any  trader  makes  in  entering 
into  an  agreement  not  to  compete,  when  he  sees  that  he  can 
gain  by  so  doing  is,  in  one  sense,  any  less  "natural"  than  his 
choice  of  the  thing  when  he  competes.  The  choice  might  be 
called  natural  but  the  situation  and  the  price  resulting  are  not 
so,  viewed  from  our  present  standpoint;  they  are  artificial  in 
the  sense  that  they  result  from  an  agreement  to  abstain  from 
the  competition  which  otherwise  would  take  place. 

§  3.  Conflicting  interests  of  competition.  The  buyers 
have  the  common  interest  of  low  prices;  the  sellers,  the  com- 
mon interest  of  high  prices;  and  buyers'  interest  as  a  group 
is  opposed  to  sellers'  interest  as  a  group.  The  competition  of 
interests  is  thus  in  two  dimensions,  but  competition  is  applied 
particularly  to  the  rivalry  within  the  group  on  either  side. 

If  there  are  more  would-be  buyers  than  sellers   (or  vice 


Ch.8]  competition  and  monopoly  76 

versa),  some  on  the  buyers'  side  will  be  forced  out  by  the  com- 
petition of  the  others;  and  even  if  the  numbers  are  equal  in 
each  group,  and  all  succeed  in  trading,  it  will  probably  be  at  a 


^'^' 

r 

Common 
w'lsh 

for 

hign 

g- 

price 

Fig.  12.  Traders'  Ixteeests  with  Respect  to 

Prick. 

ratio  altered  by  the  competition.  The  presence  of  competing 
buyers,  having  different  valuations,  raises  the  price  at  which 
some  sellers  will  be  able  to  sell  and,  vice  versa,  the  presence 
of  competing  sellers  lowers  the  price  which  some  buyers  must 
pay. 

It  would  always  be  to  the  advantage  of  the  traders  on  one 
side  (say  the  sellers)  if  some  of  their  number  would  cease  to 
produce,  or  would  produce  less,  as  this  would  raise  the  price 
that  those  remaining  could  get.  Sometimes  the  rise  of  price 
through  decreased  production  is  so  great  that  the  total  price 
of  the  whole  supply  is  greater  than  the  total  price  of  the  larger 
supply  (and  vice  versa,  in  case  of  increased  production) .  This 
is  the  paradox  of  value  applying  to  a  whole  market  and  to  the 
buyers'  curve  of  composite  demand,  rather  than  to  the  indi- 
vidual and  to  his  valuation  curve.  For  example,  the  total 
amount  of  money  received  by  all  the  farmers  of  a  country  for 
a  large  crop  of  corn,  wheat,  tobacco,  cotton,  may  be  less  than 
w^hat  would  be  received  for  a  smaller  crop.  Abundance  is 
good  for  the  purchasers  of  farm  products,  but  not.  always  ad- 
vantageous to  the  farmers  as  a  class.  This  appears  in  the 
comparison  of  amount  produced,  price  per  unit,  and  value  of 
the  total  crop,  in  successive  years;  for  example,  of  cotton  in 
the  United  States.  This  phenomenon  appears  frequently  in 
the  case  of  many  kinds  of  products.     To  the  sellers  it  is  very 


76 


ELEMENTS  OF  VALUE  AND  PRICE 


[Pt.  I 


=  T    iTo.Tail  Value, dollars'    '■ 
-£-I--[-t-r-J-f-h-|--|— ! 


•r 


\)6'0*'05"06  '07*06  \>9  '10  '11  'IE 


Fig.       13.    Cotton      Production,    ot^+i^Iq 
Prices,   and  Total  Value.*         '^^  in^i^ 


Cotton  1905-1912  U.S.  disagreeable  to  get  less  for  a 
large  crop  than  for  a  smaller 
one,  and  it  constitutes  a  motive 
for  attempting  to  control  the 
prices  to  their  own  advantage 
whenever  they  can. 

§4.  Nature  of  monopoly. 
Monopoly  is  derived  from  the 
Greek  roots,  monos  (sole,  only) 
and  polein  (to  sell),  whence  the 
abstract  noun  monopolia  (exclu- 
sive power,  or  condition  of  sale). 
It  originally  meant  the  exclu- 
sive legal  right  of  selling  some 
in  some  market.  The 
typical  monopoly  of  later  medi- 
eval and  early  modern  times  was  the  power  (or  person  or 
company  granting  it)  granted  in  a  patent  by  the  sovereign. 
The  name  patent  survives  as  the  special  name  for  the  monop- 
oly granted  by  law  to  an  inventor.  Patents  and  franchises 
of  public  corporations,  such  as  street  railways,  etc.,  are  the 
main  modern  forms  of  legal  monopoly.  The  idea  was  extended 
in  one  direction  to  include  the  right  to  deal  in  some  article, 
and  has  been  extended  in  modem  usage  in  another  direction  to 

*In  nine  changes  that  occurred  (as  compared  with  the  preceding 
year)  production  and  prices  moved  in  opposite  directions  eight  times, 
and  in  the  otlier  case  (in  1910)  price  rose  but  little  the  same  year 
that  production  increased  a  little.  No  doubt  cotton  prices  would  have 
been  on  a  lower  level  the  last  few  years  (1909-1912)  but  for  two  fac- 
tors: (1)  The  increasing  scale  of  general  prices  due  to  gold  produc- 
tion, and  (2)  the  increasing  population  and  the  corresponding  need  for 
more  cotton. 

In  five  of  the  nine  changes  the  paradox  of  value  appeared;  three 
times  (1904,  1908,  and  1911)  when  production  increased,  and  two  times 
(1909  and  1911)  when  production  declined;  and  in  still  another  year 
( 1905),  this  nearly  occurred,  for  a  crop  smaller  by  20  per  cent  had  a  total 
value  only  two-thirds  of  a  per  cent  less  than  the  year  before. 


i 


Ch.8]  competition  and  monopoly  77 

mean  economic  power  to  become  (within  limits)  the  sole  seller 
(or  buyer)  of  an  article,  whether  this  power  is  derived  from 
law  or  springs  from  the  economic  conditions.  It  is  applied 
also  to  the  group  of  persons,  or  to  the  business  company  or 
corporation,  which  has  this  power.  Monopoly,  therefore,  is  es- 
sentially opposed  to  competition,  but  only  within  a  group  on 
one  side  of  the  market,  not  in  the  market  as  a  whole.  It  sug- 
gests always  the  limitation  or  absence  of  that  rivalry  within 
the  group  of  buyers  or  of  sellers,  respectively,  which  con- 
stitutes competition. 

§  5.  Monopoly  not  merely  scarcity.  Monopoly  should  not 
be  used  as  synonymous  with  scarcity.  Scarcity  is  the  essen- 
tial condition  of  all  value.  The  simplest  things — bricks,  sand, 
the  commonest  unskilled  labor — would  have  no  value  were 
there  not  a  degree  of  scarcity.  ' '  Monopoly, ' '  whatever  else  it 
means,  always  conveys  the  idea  of  some  exceptional  kind  of 
scarcity  due  in  part  to  some  source  or  cause  not  ordinarily 
present.  Many  economic  writers,  for  example,  have  called 
land-ownership  monopoly,  saying  that  land  being  the  work  of 
nature  cannot  be  increased  by  men,  and  therefore  must  always 
be  scarce.  Even  if  it  were  true  that  in  the  economic  sense 
land  could  not  be  produced  by  man,  there  still  would  be  con- 
fusion here  between  a  general  class  of  goods  and  a  special 
thing.  The  fact  that  a  particular  field  cannot  be  duplicated 
does  not  make  a  monopoly  of  land  as  a  whole.  Nothing  can 
be  duplicated  exactly,  but  units  very  like  can  be  bought  of 
others  that  will  do  just  as  well.  It  leads  to  absurdity  to  use 
the  word  monopoly  with  reference  to  land-ownership  indis- 
criminately. Neither  the  humble  owner  of  forty  acres  of  land 
worth  four  hundred  dollars,  nor  the  owner  of  a  village  lot 
worth  a  hundred  dollars,  has  any  monopoly  power.  Neither 
mere  scarcity  nor  the  limitation  of  natural  stores  should  be 
called  monopoly  when  ownership  of  like  goods  is  scattered  and 
combination  between  owners  does  not  exist. 

§  6.  Monopoly  is  not  merely  superior  economic  power. 
Neither  does  the  ability  of  superior  material  agents  and  of 


78  ELEMENTS  OF  VALUE  AND  PRICE  [Pt.  I 

skilled  workers  to  secure  higher  returns  than  do  poor  ones 
constitute  monopoly.  The  free  competition  assumed  in  ab- 
stract discussions  of  value  does  not  mean  equal  capacity  or 
efficiency,  but  the  legal  freedom  and  the  personal  willingness 
to  move  a  productive  agent  into  the  highest  industrial  place 
it  is  capable  of  holding.  The  rocky  field  does  not  compete 
with  the  fertile  one  in  the  sense  that  it  can  yield  the  same 
uses.  The  field  fit  only  for  potatoes  does  not  compete  with 
those  rare  and  favored  localities  that  can  raise  the  best  wines. 
The  gardener  earning  two  dollars  a  day  does  not  compete  with 
the  skilled  physician  with  an  income  of  twenty  thousand  a 
year,  for  he  has  not  the  economic  capacity  to  do  so;  but  he 
is  free  to  compete  (as  is  the  owner  of  the  rocky  field)  unless 
law,  caste,  class  legislation,  social  prejudice,  or  some  other  ob- 
jective factor  forbids.  Anything,  however,  that  prevents  the 
labor  or  wealth  of  buyers  or  sellers  from  applications  for  which 
they  are  fitted,  defeats  free  competition.  To  use  the  term 
monopoly  of  any  and  every  limitation  of  economic  ability  is 
to  extend  it  to  every  case  of  value.  To  use  it  of  the  high  wages 
of  skilled  workmen,  where  no  union  to  suppress  competition 
exists  among  them,  is  to  make  it  a  colorless  synonym  of  scar- 
city. It  should  be  confined  to  a  narrower  and  more  exclusive 
use.  Some  special  kinds  of  limitation  should  be  connected  with 
the  idea  of  monopoly.  The  limitation  connected  with  monop- 
oly is  not  that  of  economic  capacity  but  that  of  ownership  and 
control. 

§  7.  Partial  competition  coexisting  with  monopoly.  The 
limitation  of  competition  in  the  case  of  monopoly  is  usually 
in  some  part  merely,  or  on  one  side  of  the  market.  It  is  true 
that  a  condition  of  double  or  two-sided  monopoly  may  exist; 
indeed,  this  is  always  the  case  in  isolated  trade,  but  the  typical 
and  important  problems  of  monopoly,  in  advanced  industrial 
conditions,  are  those  where  competition  is  removed  from  the 
traders  on  one  side  while  it  continues  to  press  with  full  force 
upon  the  traders  on  the  other  side.^ 

1  See  above,  sec.  3,  on  the  conflicting  interests  of  competition. 


Ch.  8]  COMPETITION  AND  MONOPOLY  79 

Monopoly-price,  therefore,  cannot  mean  one  which  is  de- 
termined without  the  operation  of  competitive  motives,  but 
one  which  is  determined  through  their  more  or  less  partial  and 
one-sided  operation.^  When  monopoly  exists  the  market  is 
not  a  full  or  complete  one,  but  competition  may  still  be  very 
active  in  many  respects. 

§  8.  Absolute  and  relative  monopoly.  An  absolute  mo- 
nopoly might  be  said  to  exist  whenever  the  entire  group  of 
traders  having  control  of  some  kind  of  goods,  on  one  side  of 
the  market,  is  united  to  act  as  one  person.  This  situation 
rarely  occurs  and  even  when  occurring  is  modified  by  the 
power  of  substitution  of  goods  somewhat  similar.  Monopoly, 
therefore,  is  nearly  always  relative  rather  than  absolute. 
Monopoly  and  competition  both  may  better  be  thought  of  as 
q^ialities  more  or  less  marking  the  conduct  of  traders  on  either 
side  of  a  market  than  as  absolute  concrete  situations.  The 
element  of  competition  is  always  present  in  large  measure 
either  on  both  sides  of  the  market  or  on  one  side.  Monopoly, 
however,  is  more  likely  to  occur  within  the  smaller  group  of 
traders,  while  competition  is  more  likely  to  continue  within 
the  larger  group,  and  in  varying  degrees  from  the  least  to 
the  greatest. 

Wherever  any  agreement  exists  among  bidders  it  makes 
their  action  lose,  in  so  far,  its  competitive,  and  take  on  a 
monopolistic,  character,  tho  this  may  be  very  slight  and  not 
socially  harmful.  Likewise  the  element  of  monopoly  is  present 
among  small  traders  whenever  there  is  but  one  trader  on  one 
side  (the  buying  or  the  selling  side)  and  he  makes  a  more  or 
less  separate  bargain,  at  different  prices,  with  each  of  the 
traders  on  the  other  side  of  the  trade,  forcing  each  toward  the 
upper  limit  of  valuation. 

§  9.  Motives  and  germs  of  monopoly.  As  competition  is 
always  forcing  buyers  to  bid  up,  and  sellers  to  bid  down 
against  the  general  interest  of  their  groups,  there  is  an  ever- 

2  This  caution  is  necessary  as  the  student  will  find  frequently  the 
assumption  that  a  monopoly-price  is  not  influenced  by  competition. 


80  ELExMENTS  OF  VALUE  AND  PRICE  [Px.  I 

besetting  motive  for  monopoly.  If  two  or  more  of  the  traders 
on  the  same  side  of  the  market  can  get  together  and  limit  their 
mutual  competition,  they  often  inay  gain,  tho  at  the  correspond- 
ing loss  of  the  other  parties.  Evidences  of  this  practice  ap- 
pear throughout  all  the  history  of  commerce. 

The  germs  of  monopoly  are  in  any  device  whatever,  that  is 
used  to  keep  any  trader  from  competitively  bidding  in  ac- 
cordance with  his  individual  interest  as  he  sees  it.  A  group 
of  the  most  eager  bidders  at  an  auction  sale  may  combine  and 
pay  the  least  eager  buyers  each  something  to  keep  them  from 
bidding,  and  then  buy  up  the  whole  supply  for  a  trifle.  Or 
all  would-be  buyers  may  secretly  agree  to  let  one  or  two  do 
all  the  bidding  and  to  divide  the  results.  If,  on  the  other 
hand,  the  auctioneer  has  confederates  who  pretend  to  buy  the 
goods  if  the  price  is  not  as  high  as  the  auctioneer  expects,  a 
fictitious  market  price  results,  and  buyers  lose  the  chance  that 
brings  them  to  the  auction,  that  of  "picking  up  a  bargain." 
An  auctioneer  often  conceals  the  fact  that  there  is  more  than 
one  of  an  article,  and  having  sold  it  off,  brings  out  a  second  or 
a  third  one  of  the  same  kind,  thus  keeping  the  buyers  in  ig- 
norance of  the  supply  and  getting  somewhere  near  the  esti- 
mate of  the  most  eager  buyer  in  each  case.^ 

§  10.  Types  of  monopoly-price :  receipts  vs.  profits. 
These  petty  devices  develop,  in  the  case  of  larger  markets  and 
of  many  important  articles  of  sale,  into  the  systematic  prac- 
tice of  manipulating  prices  artificially.  The  explanation  of 
the  motives  and  of  the  limits  of  monopolistic  price-fixing  would 
best  be  reserved  in  large  part  until  a  later  stage  of  our  study, 
where  it  can  be  considered  in  connection  with  enterprise.  It 
is  in  the  sale  of  the  products  of  a  business  that  the  most  im- 
portant problems  of  monopoly  are  found.  There  the  monopo- 
list is  seeking  the  highest  net  gain  over  a  considerable  period 
in  the  sale  of  a  continuous  output  of  goods.  The  cost  per 
unit  is  the  minimum  seller's  valuation  and  the  monopoly-price 
sought  is  that  which  in  the  long  run  yields  the  largest  gain 

8  See  ch.  6,  sees.  6-9. 


p 


ch.8]  competition  and  monopoly  81 

(the  product  of  units  of  sales  times  margin  of  gain  per  unit). 
Let  us  here  consider  merely  the  case  where  the  monopoly 
(seller  or  group  of  sellers)  is  seeking  the  maximum  total  price 
(not  net  gain)  for  a  stock  of  goods  which  have  no  minimum 
seller's  valuation.  Such  is  the  classic  example  of  monopoly 
in  colonial  trade  related  by  Adam  Smith:  "In  the  spice  is- 
lands the  Dutch  are  said  to  burn  all  the  spiceries  which  a  fer- 
tile season  produces  beyond  what  they  expect  to  dispose  of  in 
Europe  with  such  a  profit  as  they  think  sufficient."*  We 
may  call  this  price  which  concerns  the  gross  receipts  from 
sales,  crude  monopoly-price.  It  is  that  which  yields  the 
monopolist  (with  complete  control  of  supply)  the  maximum 
gross  receipts. 

This  type  of  cases  is  of  not  infrequent  occurrence.  Such  a 
case  is  presented  whenever  the  unsold  portion  of  a  supply 
would  go  to  waste,  such  as  perishable  goods  after  they  have 
come  to  market  (fruits,  vegetables,  etc.),  such  as  vacant  seats 
in  an  opera  house,  at  athletic  games,  etc.,  where  the  expense 
of  the  whole  performance  has  been  incurred  and  will  not  be 
increased  by  more  spectators.  This  control  of  all  the  seats 
at  a  single  entertainment  is  a  very  restricted  kind  of  monop- 
oly, and  does  not  present  a  social  problem.  There  is  still 
intense  competition  among  artists  of  all  kinds  to  provide  en- 
tertainments having  the  merits  to  attract  spectators. 

§  11.  Uniform  monopoly-price.  In  all  such  cases  the  com- 
petitive price  would  be  fixed  solely  by  the  buyers'  scale  of 
valuation,  as  in  an  auction  without  reserve.  If  the  supply  of 
goods  be  large,  approaching  the  saturation  point  of  desires, 
whether  there  be  one  seller  (without  reserve  valuation) 
or  competing  sellers,  the  price  will  tend  toward  the  valuation 
of  the  marginal  buyer,  and  in  the  extreme  case  may  sink  to 
zero.  The  only  way  sellers  can  prevent  this  is  to  reserve  a  part 
of  the  supply,  even  if  it  has  to  be  burned  up  or  thrown  away 
(fish,  fruit,  etc.),  or  remains  unused  (as  the  empty  seats  in 
a  theater).    In  the  case  shown   (in  Fig.  14  and  the  table) 

*  "Wealth  of  Nations,"  Routledge  ed.,  p.  487. 


82 


ELEMENTS  OF  VALUE  AND  PRICE 


[Pt.I 


if  there  were  7  units  for  sale,  the  unit  price  would  be  1,  the 
total  price  7,  and  each  of  the  7  sellers  would  get  1.  But  if 
the  owners  of  these  7  units  unite  and  withhold  3  units,  the 
total  receipts  are  16,  which  divided  equally,  gives  2%  units 
of  price  to  each  seller.  It  is  a  general  truth,  that  monopoly 
power  can  be  made  effective  to  raise  a  uniform  market-price 
above  what  it  would  be  if  the  monopolists  competed,  only  by 


i! 

— 1 

1 

'fi' 

.5  s 

5i 

• 

— 

Units 
1 
2 
3 


Unit  price 
7 
6 
5 


Total  Price 

7 

12 

15 


16 


Units   of  qoods 


15 

12 

7 

0 


Fio.    14.     Unifoem   Monopoly-peiok. 


artificially  increasing  scarcity,  by  limiting  supply.  Shown 
graphically,  the  maximum  crude  monopoly-price  obtainable  is 
always  the  largest  rectangle  that  can  be  inscribed  within  the 
coordinate  axes  and  the  hypothetical  demand-curve.  (See 
above  Chapter  4,  Section  11,  on  the  paradox  of  value.) 

§  12.  Uniform  monopoly-price,  inelastic  demand.  "With  a 
more  inelastic  demand,^  where  buyers'  demand  increases  very 
little  with  a  rapid  fall  in  price,  the  monopolist  must  restrict 
his  offers  more  narrowly  to  attain  a  total  price  above  the  com- 
petitive. In  Figure  15  the  offer  of  3  units  would  at  the  price 
6  yield  the  maximum  proceeds  (18),  and  any  supply  below 
that  would  be  tapping  only  the  lower  levels  of  valuation.  If  a 
few  valuations  are  high,  and  the  others  fall  very  rapidly,  the 
price  can  be  raised  very  much  more ;  as  in  Figure  15,  if  the  de- 
mand curve  were  AEFG  the  monopoly-price  would  be  9.    This 

6  Note  that  as  demand  means  number  of  units  demanded,  at  a  price, 
an  elastic  demand  means  a  large  change  of  demand  with  a  small  change 
in  price.  With  given  scales  of  price  and  of  quantities  of  goods,  the 
more  elastic  the  demand,  the  flatter  the  demand-curve. 


Ch.8] 


COMPETITION  AND  MONOPOLY 


is  the  type  of  demand  for  articles  of  great  luxury,  limited  to 
the  very  rich. 


Units 
1 
2 


Unit  Price 
10 
8 


Total  Price 
10 
16 


18 


16 

10 

0 


t05 


^E 


vF 


\ 


2     3 


Fig.    15.     Unifoem    Mokopolt-pmcb, 


5     6 
Units   of  goods 

Inelastic    Demand. 


^G 


§13.    Uniform    monopoly-price:     elastic    demand.    The 

more  elastic  the  demand  the  more  nearly  a  monopolistic  price 
approaches  a  competitive  price  with  a  given  number  of  units 
of  supply.  In  Figure  14  it  appears  that  with  any  number  of 
units  up  to  4,  the  monopolistic  and  the  competitive  market- 
prices  would  be  the  same,  and  any  restriction  would  involve  a 
loss  to  the  monopolist.  The  motive  for  monopoly  lies  in  the 
range  of  supply  of  5  units  and  beyond.  With  a  more  elastic 
type  of  demand  as  in  scale  A-B  (in  Figure  16)  where  there 
is  less  difference  in  the  valuations  of  the  most  urgent  (or  ca- 
pable) and  of  the  less 
urgent  buyer,  competitive 
and  monopolistic  market- 
prices  are  the  same  up  to 
7  units  (7X41/3  =  301/3 
total).  With  a  still  more 
elastic  demand  represented 
by  a  more  flattened  curve, 
as  in  C-D  of  Figure  16, 
the  competitive  and  mo- 
nopolistic price  are  the  same  up  to  11  units  (11  X  3%  = 
36%  total)  and  either  10  or  11  units  will  yield  the  same  total. 
Beyond  that  is  the  region  of  possible  monopolistic  price.    Com- 


FiG.   16. 


J    a    5   e    7    0 
Units  of  Goods 

Unifoem  Mongpoly-pbicb,  Elas- 
tic Demand. 


84  ELEMENTS  OF  VALUE  AND  PRICE  [Pt.  I 

pound  types  of  demand  scales,  made  up  of  different  levels  of 
demand,  would  further  strengthen  or  weaken  the  motive  to 
limit  supply.  If  the  demand  curve,  after  rapidly  falling,  flat- 
tens to  a  new  broad  field  of  demand,  a  lower  price  will  yield 
a  larger  total  than  the  previous  monopoly-price.  This  is 
the  type  of  non-essential  goods  which  remain  luxuries  when 
price  is  high,  but  rapidly  become  looked  upon  as  comforts  and 
necessities  when  price  falls. 

§  14.  Discriminatory  monopolistic  price.  It  appears 
from  the  foregoing  that  while  it  is  possible  for  sellers  to  gain 
by  the  fixing  of  a  uniform  monopoly-price  under  some  condi- 
tions, under  other  cases  it  is  not.  The  range  of  this  possibility 
is,  indeed,  much  narrower  than  would  be  anticipated  before  a 
study  of  the  problem."  But  where  a  monopoly  exists,  why 
should  it  confine  itself  to  a  uniform  price  to  all  buyers  ?  The 
very  scrutiny  of  the  differences  in  buyers'  valuations  needed 
to  fix  a  monopoly-price,  suggests  making  differences  in  prices. 
This  fact  of  practical  experience  presents  the  problem  of  dis- 
criminatory monopoly-price.  It  may  often  happen  that  the 
whole  group  of  would-be  buyers  may  be  divided  into  sub- 
groups, and  a  different  price  made  for  each  (see  Figure  17). 
This  division  may  correspond  with  differences  in  locality  (geo- 
graphical), as  in  railroad  rates  to  different  places,  different 
prices  of  petroleum  to  different  cities  or  states,  or  different  « 
rates  to  domestic  and  to  foreign  shippers  on  a  railroad,  etc.  ' 
Or  it  may  correspond  with  social  ranks,  as  can  be  done  by 
making  slight  differences  in  quality,  the  best  quality  at  a  very 
high  price  for  the  rich,  and  the  common  grades  at  low  prices 
to  the  masses.  Or  it  may  correspond  with  the  power  of  differ- 
ent buyers  to  substitute  other  goods,  or  to  resort  to  a  different 
source  of  supply,  the  poor  in  such  cases  being  made  to  pay 
more  than  the  rich.  Or  the  distinction  may  be  made  with 
reference  to  the  individual  differences  in  maximum  valuations, 

« It  must  not  be  forgotten  that  our  study  thus  far  is  limited  to  crude 
monopoly-price.  The  problem  is  different  when  it  is  one  of  profits  re- 
sulting from  the  excess  of  price  over  cost  of  production. 


Ch.8] 


COMPETITION  AND  MONOPOLY 


85 


only  to  be  known  by  intimate  personal  knowledge  or  by  an 
elaborate  system  of  espionage.  This  is  the  extremest  possible 
discrimination/ 


7 

\ 

6 

N 

5 

X 

4 

>v 

:> 

V 

\ 

■^ 

>v 

\ 

n 

r\ 

(a)      Group-price 
crimination. 


dis- 


\K 


/    2    3    4  S  6    7  g 
Urt/f'^  of  Goods. 


/    z  J  4  5  e    7  O 
Unitj  of  Oooefs. 


(b)      Individual     price 
discrimination. 
Unit  prices  all  dififer- 
ent. 


Fia.    17.     Discriminatory    Monopoly-price. 


Unit  price 

1  st  group 5 

2d   group 3 

3d   group 1 

Total  price 


Units 
3 
2 
2 


15 
6 
2 

23 


7  Thus  wliere  the  uniform  monopoly-price  is  4  per  unit,  yielding  pro- 
ceeds of  16,  a  group  discrimination  such  as  shown  in  Figure  17,  at  the 
left,  might  yield  23,  and  personal  discrimination,  as  shown  at  the  right, 
28. 


PART  II 
USANCE  AND  RENT 


CHAPTER  9 
AGENTS  FOR  CHANGING  STUFF  AND  FORM 

§  1.  Variety  in  the  objects  of  desire.  §2.  Increasing  range  of  choice 
and  use  of  goods.  §  3.  Historical  view  of  increasing  indirectness  of 
uses.  §  4.  Goods  with  indirect  uses.  §  5.  Direct  and  indirect  uses  of 
the  same  good.  §  6.  Various  changes  affecting  value.  §  7.  Agencies 
for  altering  stuff  or  material.  §  8.  Agencies  for  changing  the  form  of 
things.  §  9.  Natural  members  as  agents  in  effecting  changes  of  form. 
§  10.  The  use  of  tools  by  man.  §  11.  The  gradual  improvement  of  in- 
direct agents.     §  12.  Tools  and  machines.     §  13.  The  age  of  machinery. 

§  1.  Variety  in  the  objects  of  desire.  It  has  been  shown 
that  market-price  rests  on,  or  results  from,  valuations;  and 
that  valuations  are  the  reflection  of  the  choices  made  by  men 
among  the  objects  of  their  desires.  These  objects  are  of  the 
most  varied  nature,  and  are  capable  of  the  most  varied  uses. 
The  desires  for  these  uses  of  goods,  to  which  the  explanation 
of  price  has  been  traced,  are  neither  fixed  nor  simple  things. 
They  change  from  moment  to  moment  and  are  the  resultant 
of  man's  whole  nervous  constitution,  of  his  education  and  his 
social  surroundings,  and  of  the  objective  environment  in  which 
he  finds  himself.  The  features  of  the  environment  which  are 
of  the  greatest  import  in  affecting  the  strength  of  desires  are 
the  kinds  and  quantities  of  goods  and  the  conditions  under 
which  they  are  to  be  had. 

Every  valuation,  as  it  involves  a  comparison  of  two  things, 
implies  some  regard  to  the  conditions  of  supply.  Every  proc- 
ess of  comparison  as  we  have  seen  (Chapter  2)  is  more  or  less 
a  matter  of  impulse ;  but  it  is  generally  likewise  more  or  less  a 
matter  of  calculation.  The  range  of  a  man's  choice  is  more 
or  less  far  sighted  in  accordance  with  the  range  of  his  intelli- 
gence, his  experience,  his  knowledge,  and  his  forethought.    To 

89 


90  USANCE  Aim  RENT  [Pt.  11 

appreciate  more  fully  the  various  sorts  of  relationships  which 
exist  between  things  and  the  desires  of  men,  we  should  now 
make  a  further  study  of  economic  goods  to  see  what  are  the 
conditions  affecting  both  their  quantity  and  the  mode  of  their 
uses. 

§  2,  Increasing  range  of  choice  and  use  of  goods.  The 
simplest  form  of  life  known  to  us,  a  unit  of  protoplasm,  reacts 
in  certain  ways  to  the  things  it  touches,  reaching  out  to  absorb 
some  and  withdrawing  to  escape  others.  This  quality  in  the 
cell  of  living  matter  is  the  most  primitive  aspect,  or  element, 
in  economic  choice.  As  organisms  develop,  they  become  ca- 
pable of  reflex  action,  a  muscle  being  moved  as  a  nerve  is  stim- 
ulated, and  thus  action  becomes  more  and  more  complicated, 
developing  from  simple  reflexes  to  instincts  and  finally  to  judg- 
ments and  to  calculated  courses  of  conduct.  Every  increase  in 
the  complexity  of  nervous  structure  increases  the  complexity 
of  a  creature's  environment.  The  creature  is  in  touch  with 
more  things  and  in  more  ways,  and  is  adjusting  its  life  to 
these  things  and  the  things  to  its  life.  This  means  making 
more  and  more  indirect  and  complex  valuations. 

With  man  this  process  had  already,  at  the  dawn  of  history, 
attained  a  much  higher  stage  of  development  than  it  ever  has 
had  in  the  case  of  any  animal.  This  is  shown  by  man's  use 
of  fire,  tools,  dress,  houses,  domestic  animals,  etc.  The  proc- 
ess became  greatly  hastened  through  the  invention  of  more 
elaborate  tools  and  more  complex  and  efficient  ways  of  doing 
things  and  by  the  development  of  tastes  and  habits  of  life,  re- 
quiring more  and  more  material  objects  as  conditions  for  their 
continuance.  It  is  obvious  that  in  our  modern  civilization  man 
has  become  dependent  upon  the  uses  of  things  in  more  complex 
ways  than  ever  before;  but  further  study  and  analysis  are 
needed  to  enable  us  to  see  more  clearly  the  real  nature  of  this 
relationship  between  goods  and  man's  desires. 

§  3.  Historical  view  of  increasing  indirectness  of  uses. 
Now  the  relationship  of  goods  and  their  uses  to  desires  presents 
several  important  aspects,  the  first  that  we  shall  consider  being 


Ch.9]         agents  for  changing  stuff  and  form  91 

that  of  technical  relationship,  or  directness  of  use.  The  reader 
will  recall  at  this  point  what  was  said  (in  Chapter  3,  sections 
11,  12)  on  the  direct,  present  uses  of  goods.  It  is  goods  of  this 
kind  in  our  economic  environment  to  wliich  men  first  give  at- 
tention. This  narrow  circle  of  our  economic  environment, 
however,  which  is  in  immediate  relation  with  psychic  income, 
is  surrounded  by  broad  zones  of  goods  less  immediately  re- 
lated in  time,  or  in  space,  or  in  mechanical  working.  It  will 
aid  us  to  see  the  conditions  more  clearly  if  we  take  a  historical 
glance  at  the  development  of  man's  command  over  his  eco- 
nomic environment. 

Primitive  man  had  a  very  scanty  stock  of  goods,  the  uses  of 
which  were  direct — food,  ornaments,  clothing,  a  hut,  etc. — 
and  he  had  another  scanty  stock  of  goods  with  uses  less  direct 
— indirect  or  instrumental  goods,  such  as  his  weapons,  tools, 
dogs  and  horses  to  be  used  in  the  chase,  etc.  From  very  early 
times  men  have  been  discovering  more  indirect  yet  more  effec- 
tive ways  of  doing  things  so  that  they  could  get  more  direct 
goods,  or  better  goods,  or  could  get  them  with  less  labor,  or  in 
more  agreeable  w^ays.  A  poor  man  to-day  may  enjoy  the  use 
of  a  large  variety  of  goods  (some  being  his  own  and  a  much 
greater  mass  belonging  to  others),  while  the  modem  man  of 
"means"  brings  about  the  gratification  of  his  desires  by  the 
agency  both  of  a  great  amount  of  goods  with  direct  uses  and 
of  a  great  number  of  goods  with  indirect  uses.  Society  as  a 
whole  may  be  thought  of  to-day  as  in  the  situation  of  a  man 
of  means. 

Man  alone  regularly  makes  use  of  external  objects  as  in- 
direct agents  to  get  w'hat  he  wishes — not  using  merely  his  own 
bodily  members.  Primitive  man  saw  the  cocoanut  hanging 
above  his  head  out  of  reach.  "When  he  picked  up  a  stick  to 
throw  at  the  branch,  the  nut  was  removed  one  step  from  at- 
tainment, the  stick  was  an  economic  good  with  an  indirect  use. 
Slowly  through  thousands  of  years  the  processes  of  industry 
have  come  to  involve  more  and  more  steps  or  links.  The  Indian 
with  a  crude  knife  fashioned  his  bow  and  arrow,  fastened  the 


92 


USANCE  AND  RENT  [Pt.  H 


Leasf-  Direcf 


5M/  Le^3  Direct 


flint  and  cord  which  were  the  outcome  of  still  other  processes 
of  industry,  and  shot  the  bird  which  satisfied  his  hunger. 
To-day  in  many  cases  it  is  only  at  the 
end  of  a  long  succession  of  technical 
steps  that  men  attain  the  objects  which 
directly  yield  the  uses  they  desire. 
They  take  the  indirect  way  of  doing 
things  not  because  they  prefer  indirect- 
ness for  itself,  but  merely  because  ex- 
perience has  taught  them  that  it  is  the 
easiest  and  the  most  effective  way  of 


Les3   Direct 


Direct  Uses 


Ttinesho/d  of 
Pjt/chic  Income 
Pio.     18.     Dkcrees     of 

DiEKCTNEss  or  Uses.*     getting  what  they  desire. 

§  4.  Goods  with  indirect  uses.  Some  of  these  goods  with 
indirect  uses  are  so  near  to  having  direct  uses  that  we  hardly 
recognize  that  they  do  not  have.  It  is  the  draft  of  air  rather 
than  the  fan,  which  is  the  direct  cause  of  the  pleasant  cool- 
ness ;  the  fan  is  a  necessary  indirect  agent.  It  is  the  air-waves 
striking  on  the  ear  which  cause  the  agreeable  sound,  while 
the  violin,  the  bow,  the  skilful  hand,  are  agents  one  step  re- 
moved mechanically. 

In  a  multitude  of  cases  the  concrete,  direct  good  and  the 
thing  valued  simply  as  an  agent  to  get  it,  are  only  a  single 
step  removed  from  each  other.  The  land  and  the  trees  in  the 
orchard  are  agents  to  get  the  fruit  of  the  harvest;  the  spin- 
ning machine  and  the  loom  are  agents  to  make  cloth.  Again, 
the  good  may  be  removed  by  many  steps  or  processes  from 
psychic  income,  much  as  in  the  story  of  the  house  that  Jack 
built:  the  charcoal  heats  the  fire,  the  fire  melts  the  iron,  the 
iron  forms  the  hatchet,  the  hatchet  cuts  the  tree,  the  tree  forms 
the  boat,  the  boat  is  used  for  catching  fish,  the  fish  is  used  for 
food,  and  that  is  the  cause  of  man's  desire  for  everything  that 

•Psychic  income  may  be  represented  as  a  narrow  band  at  the  base. 
Borne  direct  uses  are  constantly  being  transmuted  into  psychic  in- 
come. In  turn  many  of  these  direct  uses  result  from  somewhat  indirect 
uses,  these  in  turn  from  more  indirect  uses,  and  the  value  of  each  and 
all  of  the  whole  series  of  uses  rests  ultimately  on  this  basis  of  psychic 
income. 


Ch.  9]         AGENTS  FOR  CHANGING  STUFF  AND  FORM  93 

went  before — charcoal,  fire,  iron,  hatchet,  tree,  and  boat. 
Again,  several  objects  may  be  complementary  agents,  that  is, 
may  be  needed  together  to  obtain  one  direct  use,  as  the  char- 
coal and  iron  and  some  other  tools  must  be  brought  together 
to  make  the  hatchet;  the  boat,  a  pole,  a  hook,  and  bait  must 
all  be  used  together  to  catch  the  fish. 

§  5.  Direct  and  indirect  uses  of  the  same  good.  Many 
goods  yield  at  the  same  time  direct  and  indirect  uses  for  the 
same  or  for  different  persons.  The  pitcher  on  the  table  as 
an  ornament  pleasing  to  the  eye  is  of  direct  use,  while  in  hold- 
ing the  water  to  quench  our  thirst  it  is  of  indirect  use.  In 
many  other  cases  the  one  thing  has  two  or  more  kinds  of  uses 
at  once,  and  the  proper  distinction  is  that  between  direct  and 
indirect  uses  of  a  good,  rather  than  between  direct  and  in- 
direct  goods.  The  wagon  carries  a  load  of  produce  to  market 
and  a  happy  family  to  the  circus  at  the  same  time;  a  train 
may  carry  both  passengers  and  freight;  a  stove  may  warm 
the  room  and  at  the  same  time  cook  the  dinner,  etc.  Again, 
the  good  may  be  used  indirectly  at  one  time  and  directly  at 
another ;  the  horse  which  plows  the  field  to-day  may  to-morrow 
draw  the  owner's  carriage.  In  still  other  cases  two  or  more 
uses,  either  direct  or  indirect,  are  possible,  but  are  mutually 
exclusive :  the  tree  may  be  kept  to  bear  fruit,  may  be  burned 
as  fuel,  turned  into  lumber  for  furniture,  or  used  to  make  a 
workbench  to  be  used,  to  make  still  other  goods. 

Directness,  like  valuation,  has  relation  to  some  one  person 
in  each  case.  There  are  many  things,  commodities  of  trade, 
which  in  their  physical  substance  and  form  are  ready  to  be 
used  directly,  yet  which  in  the  course  of  trade  are  still  in- 
direct goods  to  their  possessors.  As  yet  they  are  merely  the 
means  of  earning  a  business  profit  (have  an  indirect  use), 
but  they  will  later  render  direct  uses  to  the  final  consumer.^ 
Retail  and  wholesale  stores,  cold  storage  and  other  ware- 
houses, are  filled  with  goods  of  this  kind. 

1  This  peculiar  case  is  personal,  "contractual"  indirectness,  resujtipg 
from  a  legal  contract  between  meu. 


94  USANCE  AND  RENT  [Px.II 

Such  facts  as  these  make  it  clear  that  concrete  goods  can 
not  be  rigorously  classihed  as  either  direct  or  indirect.  Any- 
particular  good  may  under  different  circumstances  be  used 
either  directly  or  indirectly.  Therefore,  the  classification  of 
directness  and  indirectness  applies  properly  to  uses  rather  than 
to  goods,  and  it  is  a  matter  of  much  importance  in  our  study 
of  economics  to  keep  this  thought  clearly  in  mind. 

§  6.  Various  changes  affecting  value.  Desire  is  directed 
upon  concrete  goods,  but  in  the  logical  view  it  is  all  the  uses 
together  which,  as  experience  corrects  false  impulses  and 
hopes,  constitute  the  cause  of  all  the  desires  men  have  for  the 
objects  and  forces  of  the  outer  world.  Nothing  which  is  not 
in  some  causal  relation,  near  or  remote,  to  desire,  has  value. 
The  vine  which  Tantalus  is  unable  to  reach  magnifies  his 
misery.  A  captive,  chained  to  a  rock,  gets  uses  only  from  the 
things  within  his  reach.  Men  living  in  savagery  and  ignorance 
starve  amid  the  possibilities  of  plenty.  Chained  by  their  in- 
capacity and  by  their  improvidence  to  a  little  spot  of  earth, 
they  do  not  see  clearly,  either  in  time  or  in  space,  the  eco- 
nomic relations  about  them.  Men  begin  by  valuing  goods  for 
their  direct  uses,  but  the  valuation  comes  to  be  extended  over 
all  the  goods  having  indirect  uses,  which  by  instinct,  experi- 
ence, habit,  association  of  ideas,  etc.,  have  come  to  have  a 
connection  with  desire. 

The  nature  of  the  uses  rendered  by  goods  may  be  considered 
here  in  connection  with  the  thought  of  the  four  aspects  of 
choice  as  already  suggested.^  It  was  seen  there  that  choice 
presents  itself  in  one  of  four  aspects,  a  preference  for  a  kind 
of  goods  (stuff),  for  goods  of  a  particular  form,  or  at  a  certain 
place,  or  at  a  certain  time. 

Now  the  various  uses  which  are  accomplished  through  the 
indirect  instrumentality  of  goods  may  be  divided  into  four 
general  classes :  (1)  stuff  changes,  (2)  form  changes,  (3)  place 
changes,  and  (4)  time  changes.  The  blast  furnace  helps  to 
convert  the  ore  into  pig  iron.     The  sawmill  cuts  the  log  into 

2  See  note  on  Aspects  of  things  chosen,  at  end  of  ch.  2. 


Ch.9]         agents  for  changing  stuff  and  form  95 

boards.  The  steamship  carries  grain  across  the  ocean.  The 
greenhouse  hastens  the  growth  of  flowers  and  vegetables  so 
that  they  may  be  brought  earlier  to  market. 

It  is  almost  needless  to  say  that  such  changes  have  results 
in  the  realm  of  value.  For  the  increase  in  value  which  is  ex- 
pected to  result  from  these  changes,  of  course,  gives  the  motive 
for  bringing  the  changes  about.  If  grain  were  not,  to  some 
one,  more  valuable  in  Liverpool  than  in  New  York  there  would 
be  nothing  to  gain  in  shipping  it  three  thousand  miles  across 
the  ocean.  If  the  log  were  as  useful  as  the  boards,  the  labor 
and  materials  put  into  the  sawmill  could  be  turned  in  other 
directions. 

It  must  be  observed,  however,  that  all  four  considerations 
— stuff,  form,  place,  and  time — are  factors  that  enter  into 
value  whenever  value  exists.  If  a  particular  thing  has  value, 
that  value  is  due  partly  to  its  composition,  partly  to  its  form, 
partly  to  its  being  where  it  is,  and  partly  to  its  being  avail- 
able at  the  particular  time.  A  change  in  any  one  of  these 
factors  might  bring  about  a  change  in  the  value. 

§  7.  Agencies  for  altering  stuff  or  material.  Man  can 
not  create  a  single  atom  of  matter.  He  must  work  with  the 
materials  which  nature  puts  at  his  command.^  In  what  sense, 
then,  may  we  say  that  man  can  change  the  stuff  or  material 
of  which  things  are  composed  ?  There  are  many  chemical  and 
biological  processes  instituted  by  man  which  bring  about 
changes  in  the  chemical  content  and  material  composition. 
One  of  the  most  important  ways  in  which  man  makes  altera- 
tions of  this  kind  is  in  tilling  the  soil.  The  farmer  plants  the 
seed  in  carefully  prepared  ground  in  such  a  way  that  the 
proper  conditions  of  air,  light,  and  water  permit  plant- 
growth,  and  cause  the  regrouping  of  the  chemical  elements  of 
the  soil  into  new  forms  of  organic  matter.  The  first  rude 
cultivation  of  the  soil  was  a  step  beyond  the  achievements  of 
any  animal.  It  meant  the  purposeful  increase  of  the  kinds 
of  stuff  man  desired,  by  a  method  very  different  from  the 

s  Kefer  to  ch.  3,  see.  1,  on  Inherent  physical  nature  of  things. 


M  USANCE  AND  RENT  [Pt.  II 

gathering  of  honey  by  the  bee  or  the  hoarding  of  nuts  by  the 
squirrel. 

Another  important  way  of  making  changes  in  the  composi- 
tion of  materials  is  by  breeding  and  raising  domestic  animals. 
Animal  growth  transforms  the  food  elements  into  new  sub- 
stances, such  as  wool,  hides,  furs,  feathers,  fat,  eggs,  bristles, 
etc.  Still  another  way  is  seen  in  the  chemical  processes  of 
manufacturing,  such  as  iron  smelting  and  other  metallurgical 
operations,  tanning,  the  dyeing  of  clothes,  and  the  preparation 
of  food  as  in  baking,  fermenting,  distilling,  etc. 

To  make  possible  all  the  changes  w^hich  man  desires  in  the 
composition  of  things,  an  enormous  equipment  of  indirect 
agents  must  be  permanently  maintained — such  things  as  cul- 
tivated soil,  agricultural  implements,  seeds,  animals,  fertilizers, 
chemical  agents,  vats,  caldrons,  furnaces,  fuel,  etc.,  etc.  All 
these  things  are  of  value  to  man  (among  other  reasons)  be- 
cause of  the  changes  in  stuff  or  material  which  they  help  to 
bring  about. 

§  8.  Agencies  for  changing  the  form  of  things.  The  al- 
terations in  the  materials  of  which  things  are  composed  that 
do  not  involve  chemical  or  organic  changes  may  be  classed 
under  the  heading  of  changes  of  form.  It  is  probably  best  to 
class  here  most  of  the  operations  in  the  so-called  extractive 
industries  (other  than  agriculture).  Such  are  the  processes 
of  mining  or  of  quarrying  in  which  organic  or  mineral  mate- 
rials are  blasted,  dug,  or  broken  into  sizes  and  shapes  con- 
venient for  removal;  and  the  process  of  forestry  in  which 
timber  is  cut  and  prepared  to  be  taken  from  its  place  of 
growth.  There  is  always,  however,  a  considerable  amount  of 
place  change  involved  in  these  processes.  Here,  certainly,  with 
form-change  may  be  classed  the  grouping  or  arranging  of 
things  in  new  physical  relationships— such  mechanical  opera- 
tions, for  example,  as  cutting,  sawing,  splitting,  grinding,  put- 
ting together  with  nails,  screws,  or  glue,  roughening,  polish- 
ing, etc.,  etc.  Changes  of  this  sort— as  well  as  chemical 
changes— play  a  large  part  likewise  in  the  processes  of  agri- 


Ch.9]         agents  for  changing  stuff  and  form  97 

culture;  for  example,  in  plowing,  in  hoeing,  in  cutting  grain, 
in  trimming  trees,  and  in  shearing  sheep.  Some  of  the  most 
familiar  and  typical  instances  are  found  in  manufacturing 
establishments,  such  as  sawmills,  planing  mills,  and  factories 
for  shaping  wood,  iron,  leather,  clay,  and  other  materials.  A 
large  part  of  the  preparation  of  food  involves  changes  of  this 
kind.  The  performance  of  all  these  operations  involves,  of 
course,  an  enormous  equipment  of  indirect  agents — in  the 
home,  on  the  farm,  in  shop  and  factory.  This  includes  a  large 
part  of  the  stock  of  tools  and  machines,  tho  many  of  these  are 
used  also  in  effecting  changes  in  stuff,  place,  and  time. 

§  9.  Natural  members  as  agents  in  effecting  changes  of 
form.  In  the  course  of  evolution  animals  have  developed  spe- 
cial organs  which  enable  them  to  bring  about  changes  in  the 
form  of  things.  The  foot,  the  paw,  and  the  tail,  subserving 
largely  the  purposes  of  locomotion,  are  also  of  use  in  making 
physical  changes  in  the  environment.  Animals  have  teeth  to 
crush  and  cut ;  claws  and  nails  to  scratch  and  tear,  pick  and 
bore;  hoofs  to  strike;  horns  and  tusks  to  pierce,  push,  and 
crush.  The  sword  of  the  swordfish,  the  proboscis  of  the  mos- 
quito, and  the  trunk  of  the  elephant  are  highly  specialized 
organs  for  acting  upon  the  environment. 

Compared  with  many  animals  man  is  in  many  respects 
poorly  equipped  with  such  natural  weapons  and  agents.  The 
human  hand,  however,  is  perhaps  on  the  whole  the  most 
adaptable  and  effective  agent  which  nature  has  produced. 

§  10.  The  use  of  tools  by  man.  Man  is  the  tool-using  ani- 
mal. The  intelligence  which  directs  and  guides  the  hand  has 
enabled  man  to  contrive  external  agents  of  the  most  marvelous 
ingenuity  and  power.  The  first  tools,  as  is  shown  in  every 
anthropological  museum,  were  but  natural  objects  taken  to 
increase  the  efficiency  of  man's  body  in  acting  upon  the  outer 
material  world.  These  first  inventions  were  evidently  hit  upon 
almost  by  chance,  and  yet  probably  not  without  some  dim  per- 
ception of  the  fitness  of  indirect  means  to  attain  the  ends  de- 
sired.   The  stone  held  in  the  hand  multiplies  many  fold  the 


08  USANCE  AND  RENT  [Pt.  II 

force  of  the  blow.  The  chance  piece  of  sharp  or  jagged  flint 
is  vastly  more  effective  than  nails  or  claws  in  cutting  and  tear- 
ing. Boulders  and  stones  shaped  by  nature  or  very  slightly 
modified  were  the  first  rude  hammers,  axes,  and  knives.  The 
log  used  as  a  roller  under  a  heavy  load  seems  to  have  been 
the  earliest  form  of  the  wheel. 

Even  such  primitive  appliances  greatly  extended  man 's  con- 
trol over  the  world  about  him.  With  the  stone  ax  thrown 
from  the  hand  he  could  kill  animals  in  full  flight.  The  spear 
enabled  him  at  a  safer  distance  to  kill  some  of  his  most  dan- 
gerous enemies.  The  bow  and  arrow  and  the  use  of  fire  must 
have  made  his  supremacy  far  more  secure.  For  thousands  of 
years,  however,  the  first  tools  changed  but  slowly.  It  was 
difficult  to  get  beyond  the  simple,  natural  implements  picked 
up  by  chance. 

§  11.  The  gradual  improvement  of  indirect  agents.  In 
the  course  of  centuries  tools  and  weapons  gradually  became 
more  efficient.  Flint  and  stone  forms  were  copied  in  bronze 
and  in  iron.  Their  number  and  variety  steadily  increased. 
Better  and  more  numerous  hammers,  axes,  spears,  bows,  and 
arrows  were  made.  Domestic  animals  were  increasingly  util- 
ized for  food,  clothing,  and  for  the  carrying  of  burdens.  As 
a  rule  the  stocks  of  goods  with  indirect  uses  accumulated  by 
primitive  man  differed  little  in  physical  character  from  his 
goods  with  direct  uses.  Llany  of  them,  indeed,  were  things 
having  alternative  uses,  some  direct,  others  indirect.  It  is 
likely  that  horses  were  used  to  carry  men  on  their  backs  long 
before  they  were  taught  to  carry  other  burdens  or  to  draw 
heavy  loads.  The  weapons  of  the  chase  were  as  much  a  means 
of  sport  as  a  means  of  securing  food,  and  such  things  as  cloth- 
ing, tools,  and  weapons,  and  even  horses  and  slaves,  seem  to 
have  been  regarded  by  primitive  man  as  agents  to  use  di- 
rectly for  enjoyment  rather  than  as  merely  indirect  means  of 
getting  other  goods.  This  attitude  of  mind  probably  helps 
explain  the  custom  of  burying  such  things  with  the  owner  in 
his  grave — a  practice  which  greatly  hindered  progress,  as  it 


Ch.9]         agents  for  changing  stuff  and  form  99 

kept  the  primitive  community  in  poverty.  Where  such  cus- 
toms were  not  in  vogue  man's  control  over  his  environment 
developed  through  the  gradual  increase  in  his  instrumental 
equipment  from  generation  to  generation. 

§  12.  Tools  and  machines.  It  is  not  easy,  perhaps  not  im- 
portant, to  draw  a  sharp  line  of  distinction  between  the  ma- 
chine and  the  tool.  Tools  are  portions  of  matter,  such  as 
bone,  wood,  iron,  which  man  guides  and  directs  in  applying 
his  energy  to  things.  The  simple  hoe  held  in  the  hand  and 
moved  by  man's  own  strength  was  attached  to  the  beast  of 
burden  and  became  a  plow  or  harrow,  still  guided  by  man. 
A  machine  may  be  defined  as  a  mechanical  device  by  which 
power  is  applied  in  an  automatically  repeated  manner,  to 
change  the  place  or  form  of  things.  A  machine  may  be  moved 
by  the  foot,  but  the  hand  is  the  great  tool-using  member.  A 
simple,  single  piece,  that  can  be  taken  into  the  hand,  as  a 
spade,  a  hammer,  a  knife,  is  clearly  a  tool;  a  combination  of 
parts,  such  as  wheels,  levers,  pulleys,  etc.,  moving  upon  each 
other,  is  clearly  a  machine.  It  is  doubtful  whether  the  plow 
should  be  called  a  machine.  The  simplest  machine  is  but  a 
slight  adaptation  of  the  tool,  by  which  power  may  be  applied 
in  an  automatically  repeated  manner.  The  drag  develops  into 
the  cart,  a  simple  machine.  The  spinning  stick,  a  tool  used 
in  ancient  times,  developed  into  the  Saxon  spinning-wheel  of 
the  sixteenth  century,  the  form  used  when  America  was  colo- 
nized. "Wind  and  water  were  made  to  turn  wheels  to  supply 
the  power  for  moving  tools,  to  grind  the  corn,  and  to  lift  the 
hammer  too  heavy  for  man 's  strength.  The  use  of  power  de- 
rived from  nature,  while  not  the  most  essential  mark  of  ma- 
chines, is  the  most  characteristic  feature  of  their  modern  de- 
velopment. Hand  machines,  such  as  the  handpress  and  type- 
writer, have  had  important  industrial  results,  but  it  is  the 
use  of  power  that  has  led  to  the  results  of  greatest  significance 
in  recent  times. 

§  13.  The  age  of  machinery.  Inventions,  new  machines, 
and  new  processes,  tho  not  frequent,  were  not  unknown  in  the 


100  USANCE  AND  RENT  [Pt.  II 

Middle  Ages;  but  no  one  class  of  machines  took  possession  of 
whole  fields  of  industry.  The  great  industrial  changes  in  the 
Middle  Ages  generally  grew  out  of  political  changes,  or  of 
changes  of  routes  of  trade  whereby  large  industries  were  dis- 
turbed, or  of  changes  in  the  use  of  land  through  new  methods 
and  the  bringing  into  use  of  land  in  other  places.  The  indus- 
trial changes  in  England  at  the  end  of  the  eighteenth  century, 
and  a  little  more  tardily  throughout  western  Europe  and  the 
United  States,  on  the  contrary,  were  due  mainly  to  great  me- 
chanical inventions.  The  age  of  machinery  is,  therefore,  said 
to  begin  with  the  eighteenth  century.  The  development  of 
the  textile  machines  for  cotton  and  wool  spinning  and  weaving 
marks  the  beginning  of  the  movement.  Here  for  the  first  time 
were  inventions  in  such  numbers,  of  such  a  nature,  and  under 
such  conditions  that  they  were  rapidly  and  widely  applied, 
affecting  the  lives  of  a  great  number  of  workers.  The  steam 
engine  at  the  same  time  opened  up  the  long  line  of  mechanical 
inventions  by  which  wood  and  iron  are  shaped  and  wrought, 
and  the  iron  industry  underwent  notable  developments.  Since 
that  time  have  taken  place  in  all  western  countries  that  rapid 
expansion  in  the  use  of  machines  and  those  notable  changes  in 
industrial  organization  which  distinguish  our  era  from  all 
others. 


CHAPTER  10 

AGENTS  FOR  EFFECTING  CHANGES  OF  PLACE 
AND  TIME 

§  1.  Transportation.  §  2.  Location  as  an  element  in  value.  §  3.  Re- 
lation of  time  to  value.  §  4.  Indirect  agents  for  hastening  the  uses  of 
goods.  §  5.  Agencies  for  postponing  the  uses  of  goods.  §  6.  Increasing 
control  of  man  over  nature.  §  7.  Natural  diversity  both  of  direct  and 
indirect  goods.  §  8.  The  improvement  of  technical  processes  and  meth- 
ods. §  9.  The  economic  test  of  technical  improvements.  §  10.  The  psy- 
chology of  indirect  valuation.  §  11.  The  element  of  time  in  the  valuation 
of  indirect  agents. 

§  1.  Transportation.  The  third  way  in,  which  change  can 
be  effected  by  the  indirect  use  of  agents  to  bring  objects  nearer 
to  the  state  of  fitness  to  be  direct  goods,  is  by  moving  them 
from  place  to  place.  Indeed,  it  has  been  said  that  all  of 
man 's  part  in  stuff-  and  in  form-change  can  be  reduced  to  the 
changing  of  the  place  of  things  so  that  they  may  be  acted  upon 
by  each  other.  Yet  there  is  a  distinction  between  the  changes 
in  form  and  in  stuff,  just  considered,  and  the  change  in  place, 
here  indicated.  Change  of  stuff  is  arranging  things  so  that 
there  is  a  readjustment  in  their  internal  composition;  change 
of  form  is  applying  tools  and  forces  to  alter  the  shape  of  the 
objects  (often  by  combining  them  with  other  objects)  ;  and 
change  of  place  is  the  movement  of  an  object,  as  a  whole,  in 
space  to  bring  it  to  a  different  location.  Two  or  more  of  these 
changes  may  be  combined.  Felling  a  tree  is  both  a  form  and 
a  place  change,  sawing  it  into  boards  is  a  form  change,  hauling 
it  to  market  is  a  place  change,  carving  it  into  furniture  is  a 
form  change.  When  the  thing  thus  moved,  or  enabled  to  move, 
is  the  man  himself,  the  object  that  aids  is  a  direct  good.  Such 
is  the  fallen  tree  bridging  the  stream,  the  floating  log  which 
saves  the  man  from  drowning,  the  boat  on  which  he  rides  on 

101 


102  USANCE  AND  RENT  [Pt.  II 

the  water,  the  horse  carrying  its  rider,  the  sled  drawn  by  dogs 
or  by  reindeer.  When  the  agents  are  used  to  aid  in  the  move- 
ment of  other  goods  their  uses  are  indirect. 

The  means  of  transportation  have  had  a  long  and  complex 
development.  They  compose  to-day  a  mass  of  equipment  com- 
parable in  extent  and  importance  with  the  agencies  that  are 
used  to  effect  changes  in  stuff  and  in  form.  The  floating  log 
lias  been  replaced  in  turn  by  raft,  canoe,  sail  boat,  and  steam- 
ship. The  natural  waterway  has,  where  necessary,  been  deep- 
ened and  widened,  or  has  been  artificially  extended  by  canals, 
some  to  connect  rivers  and  others  to  unite  the  waters  of  the 
oceans.  The  early  trails  through  the  woods  have  given  place 
to  wagon  roads  and  to  railways.  The  heavy  ox  carts  have 
been  succeeded  by  wagons,  railway  cars,  locomotives,  automo- 
biles, and  flying-machines. 

§  2.  Location  as  an  element  in  value.  From  the  first,  of 
course,  all  these  agencies  must  have  been  more  or  less  vaguely 
recognized  as  useful  and  their  results  as  valuable.  The  rela- 
tion between  location  and  value,  however,  tho  obvious  and 
simple  in  many  concrete  cases,  has  as  a  matter  of  general 
theory  proved  difficult  of  comprehension  to  a  great  many 
minds.  Even  careful  thinkers  long  found  it  easy  to  attribute 
great  importance  to  operations  such  as  those  of  agriculture 
which  appear  to  bring  something  physical  into  existence,  yet 
to  misconceive  the  nature  of  the  changes  made  in  value  through 
manufacturing  and  transportation.  This  was  the  error  of  the 
eighteenth  century  economists  of  France — known  as  the  Physi- 
ocrats— and  it  has  been  a  recurrent  error  ever  since.  It  seems 
to  be  naturally  easy  for  men  to  conceive  of  value  as  inherent 
in  things  rather  than  as  resulting  from  a  relation  between 
things  and  men.  Yet  the  truth  is  so  obvious  that  physical 
proximity  is  a  very  significant  element  in  value.  The  treasure 
chest  which  is  lost  forever  in  the  depths  of  the  ocean  has  be- 
come and  will  remain  utterly  worthless  to  man.  Brought  to 
shore,  where  the  treasure  could  be  used,  it  might  be  worth  a 
fabulous  amount.     So  anything,  to  be  of  the  greatest  value, 


Ch.  10]  CHANGES  OF  PLACE  AND  TIME  103 

must  at  a  certain  moment  be  close  at  hand  or  at  the  right 
place.  Clearly  then  those  various  agencies  which  move  things 
from  one  place  to  another  the  better  to  meet  the  consumer's 
desires,  must  be  regarded  as  contributing  factors  in  the  value 
of  the  direct  use  obtained. 

The  logic  of  the  matter  is  quite  plain  in  the  light  of  biologic 
evolution.  Movement  is  necessary  to  the  existence  of  animals. 
The  animal,  in  the  order  of  evolution  a  higher  form  of  life 
than  the  plants,  which  are  more  fixed,  goes  to  seek  food  and 
in  so  doing  opens  up  a  wider  range  of  choices  in  life.  With 
few  exceptions  the  only  way  in  which  animals  can  better  their 
economic  environment  is  by  moving  themselves  to  a  place 
where  goods  are  more  plentiful.  In  this  matter  of  locomotion 
the  birds  have  attained  the  highest  point  in  evolution.  Man, 
while  he  has  by  mechanical  means  greatly  added  to  his  own 
powers  of  locomotion,  has  also  developed  to  a  very  high  de- 
gree of  perfection  his  ability  to  move  other  things.  He  trans- 
ports them  to  the  places  where  they  can  best  serve  his  purposes, 
and  by  this  means  he  adds  enormously  to  his  income.  Trans- 
portation is  thus  one  of  the  earliest  and  most  natural  of  the 
ways  in  which  man  increases  his  income,  and  the  elaborate 
equipment  which  he  has  developed  for  the  transportation  of 
goods  finds  its  economic  uses  in  the  gratification  of  human  de- 
sires. The  subject  of  transportation,  with  its  various  rami- 
fications, furnishes  some  of  the  most  interesting  problems  of 
valuation  with  which  the  student  of  economics  has  to  deal. 

§  3.  Relation  of  time  to  value.  As  the  days  and  hours 
succeed  each  other  in  the  life  of  man,  they  bring  with  them 
a  constant  succession  of  desires,  forming  an  endless  stream  as 
long  as  life  itself  endures.  To  meet  and  satisfy  these  desires 
a  corresponding  stream  of  goods  is  necessary.  (See  Chapter 
3,  section  10.)  Nature  furnishes  man  with  the  raw  material 
for  this  stream  of  goods,  and  even  to  a  limited  extent  provides 
fruits  and  other  things  all  ready  for  direct  use.  But  in  com- 
bining and  using  the  agents  at  his  command,  man  must  give 
much  thought  and  effort  to  the  end  that  the  direct  goods  may 


104  XJSANCE  AND  RENT  [Pt.  II 

ripen  at  the  particular  time  when  the  need  for  them  arises. 
All  desire  is  related  to  a  particular  point  of  time,  and  man,  in 
a  variety  of  ways,  controls  the  time  at  which  the  uses  of  goods 
become  available. 

One  way  in  which  this  control  is  exerted  is  through  the  sim- 
ple process  of  saving  goods  for  future  use.  If  the  goods  are 
durable,  a  present  surplus,  or  even  things  which  answer  to 
strong  present  desires,  may,  if  the  claims  of  the  future  make 
a  sufficient  appeal,  be  reserved  for  use  at  some  later  time. 
Choices  of  this  sort  between  present  and  future  are  constantly 
being  made,  and  constitute  an  important  aspect  of  our  eco- 
nomic activity.  A  new  machine  may  be  driven  twenty  thou- 
sand miles  in  the  first  year,  with  a  large  resulting  deprecia- 
tion, and  large  expense  for  upkeep.  Or  its  use  may  with  care 
be  extended  over  a  number  of  years.  The  family  may  spend 
its  full  yearly  income,  or  lay  aside  something  for  the  future. 
The  business  man  may  work  long  hours  to  accumulate  a  for- 
tune in  his  early  years,  or  he  may  take  more  leisure  and  en- 
joyment as  he  goes  along. 

All  the  decisions  in  such  cases  depend  on  one's  mental  atti- 
tude, one's  habit  of  life,  toward  present  and  future.  Men 
differ  greatly  in  this  respect,  ranging  all  the  way  from  the 
spendthrift  to  the  miser.  At  a  later  point  in  our  study  we 
shall  have  occasion  to  inquire  more  deeply  into  this  matter. 

§  4.  Indirect  agencies  for  hastening  the  uses  of  goods. 
Our  present  concern  is  with  the  use  of  indirect  agents  for  the 
purpose  of  controlling  the  time  at  which  the  uses  of  goods 
become  available.  Man  contrives  agencies  both  to  hasten  and 
to  postpone  the  processes  of  nature,  and  thereby  makes  goods 
better  or  worse  for  his  purposes.  Greenhouses  are  built  and 
equipped  with  heating  apparatus  in  order  to  produce  early 
vegetables  and  flowers ;  incubators  and  brooders  are  employed 
to  provide  the  market  with  the  tender  broiler  earlier  in  the 
season  than  the  mother  hen  would  do  it ;  apparatus  for  making 
artificial  ice  is  operated  in  the  summer  time  in  places  where 
ice  is  sure  to  be  a  free  good  a  few  months  later;  southern 


Ch.  10]  CHANGES  OF  PLACE  AND  TIME  105 

fruits  and  vegetables  are  shipped  north  by  fast  freight  to 
places  which  within  a  few  weeks  will  have  an  abundant  supply 
of  their  own  home-grown  produce.  In  all  these  eases  the 
thing  that  man  is  striving  to  do  is  to  make  things  available  at 
an  earlier  point  of  time.  And  he  employs  a  very  considerable 
amount  of  apparatus  (indirect  agents)  to  accomplish  his  end. 

Likewise  the  time  of  indirect  uses  may  be  hastened  by  the 
use  of  other  indirect  agents  (of  ** lower  rank").  The  sapling 
is  planted  in  the  forest  to  hasten  the  process  of  nature  in  grow- 
ing wood  to  be  used  in  industry ;  the  drying-kiln  makes  it  pos- 
sible to  use  the  lumber  newly  cut ;  gas  and  electricity  lighting 
the  factory  make  possible  overtime  work  to  fill  rush  orders; 
fuel  is  burnt  in  the  locomotive  to  bring  to  the  factory  the  ma- 
terials needed  just  then.  A  large  part  of  the  transportation 
by  express  is  to  bring  machinery  and  supplies  to  the  factory 
when  urgently  needed,  and  hundreds  of  dollars  have  been  paid 
thus  for  the  shipment  of  a  single  machine  across  the  conti- 
nent, when  a  few  dollars  would  have  paid  the  cost  of  shipment 
by  slower  freight. 

§  5.  Agencies  for  postponing  the  uses  of  goods.  Of  as 
great  importance  perhaps  are  the  various  agencies  for  keeping 
goods  in  proper  condition  for  use  at  some  future  time.  Grain 
is  regularly  kept  for  months  in  barns  and  elevators  where  it 
is  protected  from  the  weather.  Fruit,  vegetables,  dressed 
poultry,  and  other  meats  are  preserved  in  refrigerators  and 
cold-storage  plants,  and  fruits  and  vegetables  are  also  kept 
fresh  by  chemical  means  or  by  being  "canned"  in  jars  or  other 
vessels  from  which  germs  are  excluded.  Large  stocks  of  build- 
ing materials  and  other  things  not  ordinarily  spoken  of  as 
perishable  are  nevertheless  kept  under  roof  to  safeguard  them 
from  the  elements.  In  some  cases  the  indirect  agent  is  many 
steps  removed  from  the  final  gratification  of  desires.  There 
are  factories  employed  in  making  paint,  cement,  creosote,  pitch, 
tar,  roofing,  etc. — things  destined  to  be  used  in  turn  to  make, 
repair,  or  preserve  structures  which  shelter  stocks  of  other 
indirect  agents  for  uses  that  are  still  in  the  more  or  less  dis- 


106  USANCE  AND  RENT  [Pt.  II 

taut  future.  There  is  method,  of  course,  in  the  whole  complex 
process.  The  end  finally  achieved  is  the  production  of  "di- 
rect" goods  at  the  particular  time  when  they  are  most  desired 
by  men. 

§  6.  Increasing  control  of  man  over  nature.  The  tech- 
nical processes  of  industry  have  been  growing  more  complex, 
and  the  stocks  of  agents  used  in  these  processes  have  been  in- 
creasing since  the  beginning  of  history,  but  never  so  rapidly 
as  in  the  past  century.  This  has  resulted  in  an  enormous  mass 
and  variety  of  indirect  agents,  the  existence  of  which  is  an 
essential  aspect  of  civilized  life.  Many  materials  are  found  in 
forms  and  in  places  where  they  cannot  serve  man's  purposes. 
Energy  is  found  dissipating  itself  in  ways  useless  to  him.  As 
man  grows  in  power  of  control  over  nature,  he  strives  to  apply 
these  forces  and  materials  in  such  ways  and  at  such  places  as 
will  best  serve  his  purposes  and  gratify  his  desires.  If  he  can 
arm  himself  with  the  energies  of  mine  and  torrent,  he  can  re- 
act with  giant  strength  upon  the  material  world.  He  refuses 
to  accept  passively  its  conditions  and  to  live  on  its  grudging 
gifts.  He  becomes  its  fashioner — iu  a  sense  its  creator.  His 
intelligence  and  his  desires  are  more  and  more  potent  in  de- 
termining the  substance,  form,  place,  and  order  of  the  physical 
things  about  him.  He  transforms  the  world  in  which  he  lives. 
Accompanying  and  guiding  the  complex  processes  of  industry 
are  numberless  acts  of  choice  and  valuation.  Man's  desires  for 
direct  goods  and  his  resulting  valuations  motivate  and  direct 
his  productive  activity.  The  technical  processes  of  produc- 
tion, in  turn,  have  their  reflex  influences  upon  values.  To  ar- 
rive as  fully  as  possible  at  an  understanding  of  these  inter- 
relations is  the  task  of  the  theoiy  of  value. 

§  7.  Natural  diversity  both  of  direct  and  of  indirect 
goods.  One  of  the  basic  facts  in  the  situation  we  are  trying 
to  analyze  is  the  natural  diversity  of  things.  All  the  efforts 
of  men  in  the  most  developed  economy  can  not  annul  or  oblit- 
erate the  differences  in  the  quality  of  goods.  Desirable  goods 
are  limited  in  quantity  and  vary  in  quality.     Hence  they  have 


Ch.  10]  CHANGES  OF  PLACE  AND  TIME  107 

value,  and  some  are  more  valuable  than  others.  If  they  were 
all  alike,  they  would  all  have  the  same  relation  to  human  de- 
sires, and  would  all  have  the  same  value.  Likewise  durable 
material  agents  and  sources  of  power  are  limited  in  quantity 
and  vary  in  convenience  of  location  and  in  their  efficiency. 
As  men  seek  to  gratify  their  desires,  they  attach  importance  to 
these  agencies  for  the  achievement  of  their  ends.  Each  is 
valued  for  its  uses.  Anything  which  is  seen  to  have  a  rela- 
tion, direct  or  indirect,  immediate  or  remote,  to  the  gratifica- 
tion of  man's  desires,  is  brought  within  the  circle  of  economic 
goods. 

§  8.  The  improvement  of  technical  processes  and  meth- 
ods. The  invention,  improvement,  organization,  and  use  of 
the  various  agencies  which  we  have  been  considering,  makes 
up  the  whole  of  man's  economic  activity.  This  is,  of  course, 
a  very  broad  field,  difficult  of  comprehension  as  a  whole.  It 
comprises  a  vast  range  of  technical  achievement.  In  the  list 
of  those  who,  from  the  beginnings  of  human  culture,  have 
made  contributions  to  the  slow  task  of  improvement,  we  should 
find  Adam  the  gardener,  Abel  the  keeper  of  sheep,  Tubal-Cain, 
"artificer  in  brass  and  iron,"  Jubal  the  "father  of  all  such 
as  handle  the  harp  and  organ, ' '  Arehimides,  Gutenberg,  Watt, 
Fulton,  Elias  Howe,  Samuel  Morse,  Bessemer,  Edison,  and 
countless  others,  kno\\'n  and  unknown — peasants,  artisans,  nat- 
ural scientists,  and  practical  inventors. 

The  technical  improvements  made  by  such  men  have  been 
among  the  most  important  of  the  instrumentalities  of  eco- 
nomic progress.  They  involve  in  practically  all  cases  some  bet- 
ter combination  or  joint  use  of  complementary  agents.  The 
technical  problem  is  usually  a  matter  of  the  most  efficient 
proportioning,  combining,  or  utilizing  of  different  indirect 
agents. 

In  a  mechanism,  if  one  part  is  increased  without  increasing 
the  other  parts,  a  point  is  reached  where  it  does  not  add  to 
the  result.  If  in  the  building  of  a  bridge  the  weight  of  the 
floor  is  increased  beyond  a  certain  point,   the  rest  of  the 


108  USANCE  AND  RENT  [Pt.  II 

bridge  being  left  unchanged,  the  bridge  is  weakened  instead 
of  strengthened.  If  the  weight  of  the  iron  in  the  framework 
is  increased  beyond  a  certain  point  without  strengthening  the 
piers,  the  structure  as  a  whole  is  weakened.  If  the  piers  are 
greatly  enlarged,  the  added  materials  and  effort  may  not 
weaken  the  bridge  absolutely,  but  they  dam  up  the  stream, 
and  thus  increase  the  force  of  the  waters  pushing  against  the 
structure.  At  the  same  time,  in  flooding  the  adjacent  lands 
they  cause  another  result  which  was  not  intended  or  desired, 

A  bicycle  frame,  like  a  chain,  is  no  stronger  than  its  weak- 
est part;  if  the  strength  of  all  parts  of  the  wheel  and  frame 
is  in  proper  proportion  to  the  strain  they  must  bear,  added 
weight  to  any  single  part  weakens  the  whole  machine.  The 
development  of  the  modern  type  of  bicycle,  by  many  experi- 
ments, is  a  good  example  of  the  adjustment  of  materials  ac- 
cording to  the  principle  of  technical  efficiency. 

A  variation  of  the  same  principle  is  seen  in  chemical  com- 
binations. Exact  proportions  of  materials  must  be  used  to 
get  a  certain  result.  Increasing  one  ingredient  will  not  in- 
crease the  desired  product.  Either  the  added  part,  not  enter- 
ing at  all  into  the  compound,  remains  as  a  useless  or  an  in- 
jurious impurity,  or  it  unites  to  form  a  product  different 
from  the  one  desired. 

Thus  it  is  in  all  the  practical  arts.  The  farmer  must  have 
rain  to  water  the  crops,  but  too  much  may  ruin  them.  The 
cook  must  have  fuel  for  heat — enough  to  bake  but  not  enough 
to  burn.  The  smith  watches  the  glowing  metal  and  puts  it 
upon  the  anvil  when  it  is  just  at  the  welding  point.  The 
laundryman  puts  a  tinge  of  blue  in  the  white  clothes;  with 
less  or  more  the  clothes  are  either  too  yellow  or  too  blue.  The 
painter  must  use  the  proper  proportion  of  oil  and  white  lead 
or  the  paint  will  not  be  durable.  The  plasterer  must  mix 
neither  too  much  nor  too  little  sand  with  the  lime  if  he  will 
make  a  lasting  coating  on  the  wall.  The  potter  seeks  to  have 
the  heat  of  the  kiln  exactly  right  to  give  the  perfect  glaze  to 
the  stone-  and  china-ware.    There  is  this  technical  problem 


Ch.  10]  CHANGES  OF  PLACE  AND  TIME  109 

of  the  right  proportion  quite  independent  of  the  value  of  the 
goods.  The  idea  of  economic  utilization  arises  when  man 
recognizes  these  technical  facts  and  their  relations  to  value  in 
his  use  of  a  limited  supply  of  agents. 

§  9.  The  economic  test  of  technical  improvements.  It 
is  a  notorious  fact,  however,  that  not  every  improvement  of 
technical  method  is  advantageous  from  the  economic  point  of 
view.  The  Patent  Office  at  Washington  is  a  veritable  grave- 
yard of  ingenious  inventions  that  are  not  commercially  profit- 
able. The  inventor,  in  order  to  gain  material  rewards  and  at 
the  same  time  to  benefit  mankind,  must  study  not  only  the 
technical  side  of  his  problem,  but  the  question  of  value  as 
well.  Many  technical  improvements  of  method  cost  more  than 
they  are  worth.  The  market  may  be  too  small  to  warrant  the 
increased  investment,  or  many  other  difficulties  may  stand  in 
the  way.^  The  ultimate  test  determining  whether  a  new  proc- 
ess or  a  new  device  is  better  to  use  than  the  old  one  is  not 
technical,  but  economic.  It  must  effect  a  net  increase  in  value. 
If  it  occasions  extra  costs,  the  additional  advantages  must 
more  than  offset  them. 

§  10.  The  psychology  of  indirect  valuation.  We  have  now 
pointed  out  the  logical  relationship  between  the  desires  of  man 
and  the  valuations  which  he  puts  upon  indirect  agents.  Noth- 
ing seems  more  simple  or  obvious  than  that  the  agent  is  valued 
as  an  agent — as  an  instrumentality  in  the  gratification  of  de- 
sire. However,  it  is  well  to  recall  that  the  process  of  valua- 
tion is  not  always  as  logical  and  as  consciously  calculated  as 
it  would  seem.  The  reactions  of  men  are  in  large  part  im- 
pulsive, instinctive,  imitative,  and  habitual,  rather  than  rig- 
orously logical.  But  experience  and  reflection  alter  the 
choices  and  extend  their  range.  The  desire  which  at  one  time 
was  aroused  only  by  the  direct  good,  becomes  more  or  less 
spread  over  all  the  indirect  goods  connected  with  it.  Thus 
men,  without  deliberately  and  consciously  reasoning  on  the 
matter,  desire  directly  many  of  the  things  which  technically 

1  See,  for  example,  ch.  38,  on  Abstinence  and  production. 


110  USANCE  AND  RENT  [Px.  II 

are  of  only  indirect  use.  In  many  cases  instincts  have  prob- 
ably evolved  to  affect  desire  for  indirect  goods  whose  real  rela- 
tion to  desires  is  never  fully  perceived  or  understood  by  the 
person  choosing.  The  desires  of  civilized  men  have  become 
diffused  over,  and  now  pervade,  the  immense  complex  equip- 
ment of  the  economic  world,  and  both  the  direct  and  the  re- 
motely indirect  goods  color  the  feelings  and  influence  the  con- 
duct of  men.  They  are  alike  the  objects  of  desire.  Hesitation 
and  conscious  calculation  do,  however,  occur  in  some  choices, 
and  have  occurred  in  many  other  choices  which  have  now  be- 
come habitual.  And  in  all  highly  organized  business,  where 
production  is  for  the  market,  the  business  man  calculates  not 
only  consciously,  but  laboriously  and  with  great  care,  both  the 
desires  of  consumers  and  the  relation  of  indirect  agents  to 
those  desires. 

§  11.  The  element  of  time  in  the  valuation  of  indirect 
agents.  There  is  one  more  important  aspect  to  the  problem 
of  the  valuation  of  indirect  goods.  If  the  value  of  the  indirect 
use  is  but  the  reflection  of  the  direct  use,  it  might,  on  first 
thought,  seem  that  it  should  always  be  of  the  same  magnitude. 
If  an  agent.  A,  used  indirectly,  produces  a  limited  number 
of  direct  uses,  x,  y,  z,  it  would  seem  that  the  sum  of  their 
values  should  be  the  same  as  the  value  of  the  agent,  A,  itself. 
If  the  indirectness  of  the  process  were  the  only  factor  in  the 
case  this  would  be  true.  As  a  matter  of  fact  it  normally  re- 
quires a  certain  period  of  time  for  the  direct  use  to  be  ob- 
tained. The  uses  of  an  agent  are  frequently  spread  over  many 
years.  Because  of  this  lapse  of  time  the  value  of  the  agent  A 
at  the  present  moment  is  not  by  any  means  the  same  as  the  ag- 
gregate value  of  its  uses  in  the  future  when  they  will  occur. 
The  element  of  time  introduces  a  different  problem  which  will 
call  for  consideration  at  a  later  point  in  our  study  of  the  prob- 
lem of  value.^ 

1  Particularly  in  Part  IV  on  Time-value  and  interest. 


CHAPTER  11 
CONSUMPTION  AND  DURATION 

§  1.  Consumptive  and  non-consumptive  uses  of  goods.  §  2.  Direct  uses, 
consumptive  and  durative.  §  3.  Indirect  uses,  consumptive  and  dura- 
tive.  §  4.  The  single  consumptive  use.  §  5.  No  economic  goods  abso- 
lutely durable.  §  6.  Inevitable  depreciation.  §  7.  Using  up  of  agri- 
cultural land.  §  8.  Artificial  durability  of  agricultural  land.  §  9. 
Varying  rates  of  depreciation  of  machinery.  §  10.  Repair  of  tools  and 
machinery.  §  11.  Economy  of  repairs.  §  12.  Production  as  betterment 
and  repair  of  nature. 

§  1.    Consumptive  and  non-consumptive  uses  of  goods. 

We  have  in  the  last  two  chapters  considered  two  essential  as- 
pects that  every  use  of  a  good  exhibits.  We  have  seen  that 
every  use  is  more  or  less  direct  or  indirect  (roundabout),  ac- 
cording as  the  good  acts  directly  upon  the  person  using  it  or 
indirectly  transmits  its  effect  through  some  other  good;  this 
is  the  technical  relation  of  uses  (and  of  goods)  to  desires.  We 
have  seen  next,  that  a  use  may  be  either  present  or  future  in 
varying  degrees  (and  in  either  case  may  be  valued) ;  this  is 
the  time-relation  of  uses  to  desires.  We  now  come  to  the  con- 
sideration of  yet  another  aspect  of  use,  namely,  the  effect  that 
the  use  has  upon  the  duration  of  the  object  yielding  the  use 
(called  the  use-bearer).  This  may  be  termed  the  duration- 
relation  of  goods  to  desires.  The  apple  is  eaten  and  gone ;  the 
picture  continues  for  years  to  impart  beauty  to  the  room. 
The  lemonade  quenches  thirst  once,  the  glass  in  which  it  is 
served  may  be  used  many  times.  The  use  that  destroys  the 
good  (or  its  possibilities  of  further  use)  is  a  consumptive  use. 
Coal  is  consumed  and  becomes  ashes,  smoke,  and  gas,  as  it  is 
burnt  to  create  heat  for  comfort,  for  cooking,  and  for  steam- 
power.     The  white  gloves  are  consumed  when  they  become 

m 


112 


USANCE  AND  RENT 


[Pt.  II 


Ot^a^/'y^  O 

Jomeirhot 

/ 

Jtfayf          00re 

d, 

d. 

A, 

d. 

«, 

'* 

«* 

c. 

b, 

b. 

6. 

b. 

a. 

a^ 

•., 

*» 

masf   \ 


yindtttf 


soiled  (unless  they  can  be  cleaned).  There  is,  of  course,  no 
physical  annihilation  of  matter  in  any  of  these  cases,  but 
merely  a  change  in  the  qualities  that  relate  the  good  to  de- 
sires. The  essential  test  of  economic  consumption  lies  in  the 
effect  that  use  has  in  unfitting  the  use-bearer  for  the  rendering 
of  subsequent  uses. 

In  contrast  with  the  thought  of  consumption  of  a  use-bearer 

is  the  thought  of  its  dura- 
tion. In  contrast  with  the 
consumptive  use,  which 
uses  up  the  use-bearer,  is 
the  durative  use  which 
leaves  the  use-bearer  more 
or  less  capable  of  render- 
ing subsequent  uses.  These 
ideas  are  abundantly  illus- 
trated in  what  follows. 

§  2.  Direct  uses,  con- 
sumptive and  durative. 
Direct  goods  that  are  momentary  gratifiers,  yielding  only  a 
single  use,  and  being  destroyed  in  the  using,  are  represented 
by  multitudes  of  consumable  foods  and  drinks  in  cellars  and 
in  pantries,  on  tables,  in  restaurants,  hotels,  and  saloons;  by 
matches,  candles,  oil,  gas  for  lighting,  fuel  for  heating  houses ; 
by  cigars,  fireworks,  and  many  other  things  which  appeal 
directly  to  the  senses.  The  use  of  these  things  when  it  occurs 
unites  the  three  qualities;  it  is  direct,  it  is  present,  it  is  con- 
sumptive. 

A  dwelling  is  an  example  of  a  good  for  direct  use  which  is 
durable  and  gives  off  throughout  a  period  of  time  a  series  of 

•  If  degrees  of  directness  are  represented  as  ranging  from  a  to  d 
(as  in  Figure  18)  then  degrees  of  durativeness  may  be  represented  as 
ranging  from  1  to  4  (4  being  the  consumptive  use).  These  qualities 
thus  are  in  two  dimensions;  for  example,  the  use  of  a  marble  statue 
might  be  called  a  ,  that  of  a  tent  a  ,  that  of  a  match  for  lighting  a  blast 
furnace  d  ,  etc. 


Fio.  19. 


Degrees  of  Dibectness  akd  of 
Durativeness.* 


Ch.  11]  CONSUMPTION  AND  DURATION  113 

direct  uses.  The  durability  of  houses  is  not  absolute  or  uni- 
form, but  is  more  or  less,  varying  from  the  Indian  tepee  to 
the  marble  or  granite  palace  that  will  stand  for  centuries. 
Houses  are  subject  to  wear  and  tear,  and  thus  undergo  a  slow 
consumption,  but  this,  with  care,  is  so  slight  that  it  often  is 
less  than  the  deterioration  from  disuse.  The  supply  of  hous- 
ing, while  insufficient  for  some  classes  of  our  population,  is 
to-day  enormous — winter  houses  and  summer  houses,  city  and 
suburban,  private  houses  and  hotels,  churches  and  theaters. 
All  are  more  or  less  durable,  and  are  direct  goods,  excepting 
as  the  owners  use  them  in  business  as  a  source  of  rent  or  of 
profit.  Every  durable  agent,  of  course,  contains  future  as 
well  as  present  uses.  That  is  the  essence  of  the  idea  of  dura- 
tiveness.  Direct,  present,  and  durable  (in  a  degree)  are  also 
furniture,  pianos,  organs,  and  musical  instruments  of  every 
kind,  carriages  and  horses,  bicycles,  automobiles,  boats,  and 
many  other  material  agents  used  for  enjoyment.  Especially 
good  examples  of  this  class  of  goods  are  those  whose  appeal  is 
to  the  eye — pictures,  statuary,  and  other  contents  of  private 
and  of  public  museums.  Very  similar  in  this  regard  are 
all  grounds  with  improvements  used  for  residence  purposes,  all 
yards,  trees,  lawns,  playgrounds,  public  parks  and  reserves  for 
sightseers  such  as  the  Yosemite  Valley,  Yellowstone  Park,  and 
Niagara  Falls,  and  mountains  covered  with  forests  held  for 
private  or  public  pleasure  in  hunting,  fishing,  and  camping. 
Nearly  all  the  material  equipment  used  in  education  is  marked 
by  this  grouping  of  qualities,  as  well  the  school  grounds  as  the 
school  books,  libraries,  furniture,  and  apparatus  for  illustra- 
tion and  instruction.  Among  the  most  lasting  of  the  goods 
which  man  has  shaped  by  his  action  are  great  engineering 
works — railroad  tunnels,  bridges,  aqueducts,  roadways,  canals 
between  rivers,  lakes,  and  oceans  (Panama,  Suez,  etc.).  These, 
so  far  as  they  are  used  by  passengers,  are  giving  direct  uses. 
Ornaments  and  other  goods  made  of  the  precious  metals  are 
among  the  most  durable  of  the  direct  goods  man  possesses. 
Other  kinds  of  ornament,  such  as  feathers,  laces,  and  ordinary 


114  USANCE  AND  RENT  [Pt.  II 

clothing,  while  less  durable  than  most  of  the  foregoing  exam- 
ples, share  the  quality  of  durability  in  a  degree  and  with  care 
may  be  made  to  yield  very  lengthened  series  of  uses. 

§  3.  Indirect  uses,  consumptive  and  durative.  We  turn 
now  to  illustrations  of  indirect  uses  which  are  consumptive 
or  durative  in  varying  degrees  (and,  of  course,  either  present 
or  future) .  Many  of  the  objects  that  yield  indirect  uses  yield 
at  the  same  time  direct  ones;  indeed,  this  is  the  rule  rather 
than  the  exception.  Other  examples  of  consumptive  goods  used 
indirectly  are:  the  oil  giving  light  in  the  factory,  the  ice  in 
the  refrigerator.  These  are  present  uses  and  are  also  capable 
of  direct  use.  The  oil  in  a  tank,  and  the  ice  in  the  icehouse 
contain  future  consumptive  uses.  A  dynamo  producing  elec- 
tricity is  yielding  a  present  durative  use  and,  as  it  is  capable 
of  continuing  to  yield  similar  uses,  it  contains  also  future  dura- 
tive uses.  Further  examples  are  most  tools,  implements,  and 
machines,  and  all  houses,  lands,  engineering  works,  and  all 
transportation  agencies  that  are  used  both  directly  for  pas- 
senger service,  and  indirectly  in  carrying  freight. 

§  4.  The  single  consumptive  use.  The  distinction  between 
consumptive  and  durative  uses  should  be  kept  clearly  apart 
from  that  between  direct  and  indirect  uses.  As  a  matter  of 
fact,  directness  of  use  is  essentially  a  technical  rather  than  an 
economic  quality.  It  is  equally  important  to  keep  the  matter 
of  the  "timeliness"  of  a  use  distinct  from  either  "directness" 
or  "consumptiveness."  In  connection  with  timeliness  arises 
the  very  subtle  problem  of  capital-value,  which  will  be  discussed 
at  some  length  in  Part  IV  of  this  book.  Wrapped  up  with 
the  question  of  durability  is  a  problem  to  which  we  must  give 
earlier  consideration — the  problem  of  usance-value.  This  will 
be  taken  up  in  Chapter  13.  Our  immediate  task,  however,  is 
a  somewhat  further  consideration  of  the  nature  of  the  distinc- 
tion between  consumptive  and  durative  uses. 

We  have  been  employing  the  words  consumptive  and  dura- 
tive as  contrasted  terms.  Strictly  speaking,  however,  con- 
sumptive and  durative  uses  shade  into  each  other  by  almost 


Ch.  11]  CONSm^TPTION  AND  DURATION  115 

imperceptible  gradations.  Even  most  of  the  more  fleeting  uses 
continue  through  an  appreciable  period  of  time.  The  great 
majority  of  goods  in  which  man  is  interested  are  more  or  less 
durable  in  character.  The  things  which  may  reasonably  be 
said  to  have  consumptive  uses — that  is,  things  which  are  con- 
sumed at  a  single  use — are  relatively  few,  tho  absolutely  nu- 
merous and  important.  Food,  for  example,  is  consumed  at  a 
single  use;  illuminants  and  fuel  can  be  used  but  once;  cut 
flowers  quickly  wither  and  fade.  The  materials  of  which  these 
things  were  composed  are  dissipated  in  sewage,  garbage,  rub- 
bish, dust,  ashes,  carbonic  acid  gas,  etc.,  and  can  be  reassembled 
— if  at  all — only  with  difiiculty. 

§  5.  No  economic  goods  absolutely  durable.  At  the  other 
end  of  the  scale  are  things  which  render  their  services  for  an 
extremely  long  period  of  time.  All  earthly  things,  however, 
wear  out,  change,  or  decay.  Whenever  man's  hand  is  with- 
held, nature  takes  possession  of  his  work,  regardless  of  his 
purposes.  Dust  gathers  on  unused  clothes,  and  moths  burrow 
in  them.  Shut  up  a  house,  and  windows  are  shattered,  roofs 
leak,  and  vermin  swarm.  To  close  a  factory  is  to  hasten  the 
time  when  buildings  and  machinery  will  be  piled  upon  the 
rubbish  heap.  The  most  magnificent  and  solid  works  of  man 
have  crumbled  under  the  finger  of  time.  The  earth  is  strewn 
with  ruins  of  gigantic  engineering  works,  aqueducts,  canals, 
temples,  and  monuments,  whose  restoration  would  be  no  less 
a  task  than  was  their  first  building.  Everywhere  vigilance  and 
repairs  are  the  conditions  of  continued  uses  of  wealth.  There 
are,  thus,  no  economic  goods  which  as  usable  wholes  are  abso- 
lutely durable.  When  we  divide  uses  into  those  which  are  con- 
sumptive and  those  which  are  durative,  we  mean  simply  that 
the  duration  of  the  goods  yielding  the  former  is  relatively 
brief,  whereas  the  latter  endure  through  a  relatively  long 
period  of  time.  The  line  of  demarcation  between  the  two  is 
not  absolute  or  sharp. 

§  6.  Inevitable  depreciation.  Changes  go  on  in  the  sub- 
stance of  things  which  cannot  be  prevented  by  any  attention 


118  USANCE  AND  RENT  [Pt.  II 

to  repairs.  The  wood  in  a  framework  will  decay,  the  metals 
crystallize.  There  is  also  an  unpreventable  wear  of  parts  that 
can  not  be  replaced  without  replacing  the  whole  machine.  It 
is  the  aim  of  the  modern  manufacturers  to  make  machines  like 
the  wonderful  one-horse  shay,  every  part  of  equal  durability. 
The  development  in  America  of  the  system  of  "  interchangeable 
parts"  has  greatly  simplified  and  cheapened  repairs,  and  has 
lengthened  the  working  life  of  machines;  nevertheless  they 
go  at  last  to  the  scrapheap.  This  general  depreciation  appears 
to  be  nearly  avoided  in  large  factories  where  there  is  serial  re- 
placement of  the  parts,  but  occasionally  some  invention  or 
some  improvement  of  process  necessitates  an  almost  completely 
new  equipment.  An  old  man  said  to  me  when  I  was  a  boy : 
"I  built  this  house  and  have  lived  in  it  forty  years;  it  was 
well  built,  has  been  repainted  regularly,  has  never  been  allowed 
to  leak  a  drop,  and  it  is  as  good  as  it  ever  was.  I  see  no  rea- 
son why  it  could  not  be  kept  to  eternity  if  always  kept  in 
repair."  But  the  same  could  not  be  said  of  the  house  now. 
There  is  a  termination  of  the  use-bearing  power  of  nearly  all 
kinds  of  goods,  by  this  natural  decay  or  by  technical  progress, 
and  they  have  to  be  replaced  by  new  stuff  and  by  new 
forms. 

§  7.  Using  up  of  agricultural  land.  Even  land,  which  men 
are  prone  to  think  of  as  everlasting,  is  in  some  of  its  most  im- 
portant uses  subject  to  constant  wear  and  loss  of  its  valuable 
qualities.  In  agriculture  the  land  furnishes  not  only  standing 
room  and  a  surface  exposed  to  air,  sun,  and  rain,  but  a  store 
of  materials  fitted  to  nourish  vegetation.  Under  the  proper 
conditions  of  heat,  moisture,  and  texture  of  soil,  the  plants, 
through  the  aid  of  bacteria,  select  and  take  up  partly  from  the 
air  but  mostly  from  the  soil,  the  chemical  elements  needed 
for  their  growth.  Cultivation  of  the  soil  is  regrouping  and 
collecting  the  fertile  elements,  but  harvesting  the  crop  is  ex- 
tracting them  from  the  soil.  This  process  can  not  be  continued 
indefinitely  unless  these  elements  are  restored  to  the  land.  The 
barbarian  lacked  the  forethought  and  patience  to  preserve  the 


Ch.  11]  CONSUMPTION  AND  DURATION  117 

land,  and  his  methods  of  agriculture  used  up  the  soil.  After  a 
few  years  he  moved  on,  burned  and  cleared  out  another  little 
space  in  the  midst  of  the  forest.  The  progress  of  men  toward 
a  settled  life  and  a  permanent  agriculture  has  been  accom- 
panied step  by  step  by  the  introduction  of  conservative  (dura- 
tive)  methods  of  using  the  arable  land.  The  temptation  to 
revert  to  improvident  methods  has  again  and  again  shown  itself 
as  a  result  of  the  demoralization  of  war,  of  invasion  by  less 
advanced  peoples,  or  of  the  opening  of  great  areas  of  new 
lands.^ 

§  8.  Artificial  durability  of  agricultural  land.  When  a 
method  of  permanent  agriculture  has  become  firmly  established 
in  a  community,  guarded  by  ancient  customs  and  by  very  care- 
ful contracts  between  tenants  and  landlords,  agricultural  es- 
tates, as  wholes,  are  given  artificially  an  appearance  of  great 
durativeness,  altho  the  land,  excepting  as  bare  surface,  is  being 
repaired  and  remade  continuously.  The  uses  of  the  farm  are 
estimated  as  a  net  sum,  after  deducting  the  cost  of  all  the  re- 
pairs. Agricultural  land  has  constituted  in  western  Europe 
in  recent  centuries  the  most  permanent  body  of  wealth,  and 
thus  it  came  to  be  looked  upon  mistakenly  as  a  most  perfect 
type  of  durative  goods.  Land-sites  for  residence  and  business 
uses,  merely  as  standing  room,  are  in  most  locations  among  the 
most  durative  of  all  forms  of  wealth ;  on  the  contrary,  mineral 
deposits  constitute  a  strikingly  consumptive  form  of  use-bearer. 

§  9.  Varying  rates  of  depreciation  of  machinery.  There 
is  a  great  difference  in  the  length  of  the  economic  life  of  manu- 
facturing appliances.  The  building  is  fairly  durable;  yet  in 
good  business  practice  an  average  depreciation-rate  of  1% 
per  cent  a  year  is  allowed  to  offset  a  reduction  in  its  value  of 
over  50  per  cent  in  thirty  years,  after  providing  insurance 
against  the  chance  of  loss  by  fire.  Machinery  differs  greatly 
in  durability;  well-made,  substantial  machinery  depreciates 
about  5  per  cent  yearly.     The  engines  and  boilers  depreciate 

1  See  ch.  35  for  further  remarks  on  the  destruction  and  conservation 
of  farm  lands. 


118  USANCE  AND  RENT  [Pt.  II 

more  rapidly  than  the  running  gear;  the  loose  tools  have  to 
be  replaced  every  second  to  fourth  year;  while  the  materials 
consumed  in  the  industry  must  be  repaired  and  replaced  at 
every  repetition  of  the  process  of  manufacture.  If  a  factory 
is  to  be  maintained  in  its  efficiency  in  a  way  to  afford  its  owner 
a  continuing  income,  everything  about  it  must  be  from  time 
to  time  repaired  and  replaced. 

§  10.  Repair  of  tools  and  machinery.  Separate  tools  are 
dependent  for  their  usefulness  on  substance  and  form,  and  they 
gradually  undergo  changes  which  consume  them — by  decay, 
rust,  wear,  breakage,  etc.  They  thus  as  a  class  are  looked  upon 
as  consumptive  agents.  Yet  the  whole  groups,  the  parts  of 
which  can  be  separately  repaired,  may  be  given  artificially  a 
large  measure  of  durativeness. 

The  railway  unites  in  a  large  degree  the  use  of  land  surface 
with  that  of  durable  forms  of  metals.  The  roadbed,  which  is 
but  the  natural  surface  excavated  or  filled  to  a  more  suitable 
grade,  is  the  most  permanent  part;  yet  every  frost  weakens, 
every  rain  undermines,  a  portion  of  it.  Earthquake,  land- 
slide, and  flood  fill  up  the  ditches,  or  tear  down  the  embank- 
ments. Constant  work  is  needed  to  keep  it  fit  and  safe  for 
use.  On  the  roadbed  is  the  track,  slightly  less  permanent, 
more  frequently  changed.  The  ties  rot,  and  even  the  steel 
rails  must  be  replaced  in  twenty  or  thirty  years.  The  rolling- 
stock  is  still  less  durable,  and  the  different  parts  vary  in  length 
of  life.  It  is  said  that  the  wheel-tires  of  a  locomotive  are  re- 
newed four  times,  the  boiler  three  times,  and  the  paint  seven 
times,  before  the  machine  as  a  whole  is  rejected  as  entirely 
worn  out.  The  oil  used  on  the  bearings,  which  is  a  necessary 
part  of  the  running  machine,  has  to  be  applied  every  day. 

§  11.  Economy  of  repairs.  In  general  the  maintenance  of 
repairs  in  durative  agents  is  a  large  part  of  the  practical  art 
of  the  business  manager,  whether  husbandmen  or  artizan.  It 
is  an  art  calling  for  as  much  judgment  and  skill  as  does  any 
part  of  the  management.  The  neglect  of  repairs  may  have 
different  results  in  the  different  parts  of  the  enterprise.     Fail- 


Ch.  11]  CONSUMPTION  AND  DURATION  119 

ure  to  replace  separate,  worn-out  tools,  while  not  preventing 
the  future  restoration  of  the  plant  to  its  full  efficiency,  causes 
the  factory  as  a  whole  to  be  less  efficient.  Each  part  of  the 
entire  outfit  being  needed  in  due  proportion,^  the  want  of  any 
one  tool  causes  a  loss  of  the  efficiency  of  the  factory  as  a  whole 
disproportionate  to  the  missing  tools.  Failure  to  apply  seed 
to  the  land  causes  the  land  as  a  whole  to  be  useless  for  that 
year's  crop.  The  seed  is  a  necessary  part  of  the  productive 
field,  considered  as  a  unit,  and  its  annual  application  is  closely 
analogous  to  repairs.  In  other  cases,  neglect  of  repairs  in- 
creases the  expense  of  repairs  and  cuts  off  future  incomes. 
The  adages,  ' '  A  stitch  in  time  saves  nine, ' '  and  ' '  An  ounce  of 
prevention  is  worth  a  pound  of  cure,"  must  be  acted  upon  in 
every  industry.  The  neglect  to  repair  a  roof  causes  damage 
to  an  amount  many  times  the  cost  of  a  new  roof.  Failure  to 
replace  a  bolt  costing  five  cents  may  result  in  the  rack  and 
ruin  of  a  machine  worth  many  dollars.  A  handful  of  earth 
on  a  dike  may  save  a  whole  country  from  destruction.  In 
every  business  that  is  to  be  continued  it  is  true  that  neglect 
or  postponement  of  repairs  causes  a  falling  off  of  the  value 
of  the  uses,  usually  far  outweighing  the  temporary  saving  in 
cost.^ 

Neglect  of  repairs  may  be  economical,  however,  when  indus- 
trial changes  have  first  reduced  the  demand  for  the  agent  and 
consequently  the  value  of  its  uses.  When  the  line  of  travel 
changes,  it  does  not  pay  to  keep  an  old  hotel  up  to  the  same 
state  of  repair  as  when  it  had  a  great  patronage.  Old  factories 
sometimes  may  better  be  allowed  to  depreciate,  while  the  price 
of  repairs  is  invested  in  more  prosperous  industries.  In  a  de- 
clining neighborhood  the  houses  fall  into  decay,  the  owners 
seeing  that  "it  would  not  pay"  to  keep  them  up. 

§  12.  Production  as  betterment  and  repair  of  nature.  Let 
us  take  a  general  view  of  the  topics  of  this  chapter.     The  one 

2  See  below  on  proportionality,  ch.  12. 

3  See  below  on  cost,  ch.  28,  and  on  time-value,  ch.  20,  and  ch.  21, 
sec.  2. 


120  USANCE  AND  RENT  [Pt.  11      , 

general  method  of  industry  from  the  advent  of  man  upon  the 
earth  to  the  present  moment  has  been  that  of  appropriating 
natural  objects  as  they  are  found  in  the  world.  Man  takes 
these  objects,  improves  them  where  he  can,  destroys  (con- 
sumes) some  in  the  using,  and  repairs  others  as  they  wear  out. 
That  is  all  that  "production  of  material  goods"  as  an  economic 
act  ever  can  be — appropriating,  bettering,  conserving,  and  re- 
pairing natural  objects.  Production  is  drawing  out,  leading 
forth  something  that  is  already  there.  The  supplies  of  goods 
were  at  first  conditioned  and  limited  by  the  soil  and  climate, 
by  flora  and  fauna.  Man's  part  in  ''production"  consisted  at 
first  in  picking  the  fruits  and  in  killing  the  animals  which  na- 
ture had  produced.  Gradually,  however,  man  has  intervened 
more  and  more  at  earlier  stages  of  the  natural  processes,  has 
guided  and  aided  them. 

The  attempt  has  been  made  to  divide  economic  goods  into 
two  classes,  ascribing  to  the  one  class  permanency  and  calling 
them  the  natural  agents  (the  unproduced  goods) ;  and  to  the 
other  the  possibility  of  indefinite  inereaseableness,  the  artificial 
agents  (the  produced  goods).  This  is  a  futile  distinction  to 
apply  to  goods  in  modem  industrial  countries,  and  it  obscures 
the  true  nature  of  production.  We  take  the  original  stuff  of 
which  everything  is  composed,  whether  arable  field  or  house 
or  watch-spring,  as  we  find  it  in  nature.  Nearly  everything 
not  now  underground  (even  land  surface  for  business  build- 
ings, for  residence,  and  for  agriculture)  is  more  or  less  arti- 
ficial, that  is,  has  in  some  degree  been  altered  by  man 's  action 
in  leveling,  digging,  shaping,  fertilizing,  etc.  The  minerals 
beneath  the  surface  of  the  earth  remain  most  truly  "natural" 
until  they  are  appropriated,  when  many  of  them  as  elabo- 
rated articles  become  the  most  artificial  of  all  material 
goods. 

Instead,  therefore,  of  trying  to  classify  concrete  goods  as 
artificial  and  natural,  it  is  better  to  make  a  continuity  classi- 
fication and  to  distinguish  the  consumptive  and  durative  qual- 
ities of  goods  which  are  found  in  varying  degrees  in  all 


Ch.  11]  CONSIBIPTION  AND  DURATION  121 

agents.  We  shall  later  see  how,  in  a  variety  of  ways,  men 
take  account  of  these  differing  qualities  and  adjust  their  acts 
and  their  valuations  accordingly. 


CHAPTER  12 
THE  PRINCn»LE  OF  PROPORTIONALITY 

§1.  The  principle  of  proportionality;  its  general  nature.  §2,  Cost 
and  sacrifice  defined.  §  3.  Sacrifice  of  effort  a  matter  of  proportion. 
§  4,  Sacrifice  involved  in  common  use  by  several  users.  §  5.  Gross  and 
net  uses.  §  6.  The  doctrine  of  separable  uses.  §  7.  More  intensive 
utilization.  §  8.  More  extensive  utilization.  §  9.  Application  of  comple- 
mentary agents  at  the  two  margins.  §  10.  The  principle  of  proportional- 
ity in  agriculture.  §  11.  Intensive  use  of  ground  space.  §  12.  Intensive 
use  of  tools  and  machinery.  §  13.  Intensive  development  of  water  power. 
S  14.  Bearings  of  the  principle. 

§  1.  The  principle  of  proportionality;  its  general  nature. 
In  what  has  been  said  in  regard  to  scarcity  as  an  element  in 
value  (Chapter  2)  it  was  implied  that  value  involves,  in  the 
simplest  ease  of  direct  or  immediately  enjoyable  goods,  a  cer- 
tain proportionality  between  goods  and  the  desires  of  men. 
The  more  abundant  are  goods,  relative  to  the  desire  for  them, 
the  less  is  their  value.  Similarly,  in  connection  with  the  prin- 
ciple of  evaluation  (Chapter  4),  we  encountered,  in  the  rela- 
tions between  the  stimuli  and  the  reactions  of  the  nervous 
system,  a  certain  quantitative  relation,  or  principle  of  pro- 
portionality. In  the  whole  process  of  trade,  also  (Chapter 
5,  Trade  by  Barter) ,  which  is  the  adjusting  of  a  ratio  between 
two  or  more  goods  in  a  group  of  traders  seeking  to  buy  and 
sell,  an  element  of  proportionality  is  plainly  involved.  And 
still  later  (in  the  last  three  chapters,  9-11)  in  discussing  the 
improvement  of  productive  processes  we  have  touched  upon 
the  important  problem  of  proportionality  in  the  use  and  de- 
velopment of  indirect  agents.  We  saw  that  the  development 
of  new  inventions,  new  processes,  etc.,  was  largely  a  matter 

122 


Ch.  12]  THE  PRINCIPLE  OF  PROPORTIONALITY  123 

of  bringing  things  together  in  the  most  effective  way — that 
is,  in  the  best  proportions  for  the  accomplishment  of  certain 
physical,  mechanical,  chemical,  or  other  desired  technical 
results. 

§  2.  Cost  and  sacrifice  defined.  In  our  evaluations  there 
are  usually  certain  negative  items  variously  referred  to  as 
cost  or  as  sacrifice.  In  its  broadest  sense  cost  may  be  defined 
as  that  which  must  be  given  up  to  get  another  thing.  This 
is  its  original,  and  still  general,  meaning.  This  would  in- 
clude, on  the  one  hand,  sacrifices  of  a  purely  psychic  nature 
— disappointments,  regrets,  etc.,  caused  by  doing  or  by  giving 
up  a  thing;  and,  on  the  other  hand,  the  prices  of  things — 
whether  expressed  in  money  or  in  other  goods.  Usually, 
however,  in  business  the  word  cost  is  given  a  more  specialized 
meaning,  and  we  shall  take  this  in  order  to  distinguish  it 
from  price  in  general  on  the  one  hand,  and  from  sacrifice  on 
the  other.  In  this  narrower  connotation  cost  means  the  out- 
lay (considered  as  a  business  expense  and  expressed  in  money 
terms)  which  a  person  must  make  in  order  to  obtain  a  cer- 
tain product  from  goods.  Sacrifice  may  be  defined  as  that 
less  definitely  measured,  psychic,  alternative  good  (whether 
of  enjoyment  or  of  freedom  from  effort)  which  must  be  given 
up  to  get  another  good.  Finally,  price  is  the  good  surren- 
dered in  a  trade  with  another  person. 

Sacrifice  is  involved  in  every  choice  and  in  every  price  in 
barter  or  sale;  but  cost,  in  this  business  man's  sense,  only 
when  the  outlay  for  a  good  up  to  date  is  compared  with  its 
value  or  with  its  selling  price. 

§  3.  Sacrifice  of  efi'ort  a  matter  of  proportion.  In  the 
case  of  complementary  agents  (see  Chapter  4,  section  5)  the 
valuation  of  each  in  any  particular  use  is  constantly  affected 
by  the  valuation  of  the  other.  This  always  involves  a  prob- 
lem of  proportionality.  The  simplest  case  is  presented  by 
the  use  of  one's  time  and  labor  in  getting  enjoyment  from  a 
direct  good.  The  sacrifice  of  time  and  labor  are  outlays  which 
have  to  be  balanced  against  the  gross  or  total  advantage  af- 


124  USANCE  AND  RENT  [Pt.  II 

forded  by  the  good.  It  is  a  sort  of  offset  or  deduction,  and 
the  real  or  net  service  or  psychic  income  is  the  resultant  of 
the  action  of  the  two  complementary  goods,  the  man's  effort 
and  the  material  object.  A  piano  is  capable  of  being  played 
upon  steadily  for  twenty-four  hours  a  day,  but  the  player  be- 
comes weary  after  two  or  three  hours,  and  values  the  uses  of 
the  piano  for  the  rest  of  the  day  at  zero.  These  uses  must 
go  for  nothing  if  the  piano  is  not  played,  but  they  are  to  be 
realized  at  too  great  a  sacrifice.  A  case  of  this  kind  is  pre- 
sented whenever  any  durable  agent  in  the  owner's  hands  is 
capable  of  affording  additional  uses  which  as  a  matter  of 
fact  are  not  availed  of.  Such  uses  lie  beyond  the  boundary 
of  economic  utilization,  for  the  owner  has  not  the  time  to  use 
them — or  the  energy,  or  the  present  desire. 

Riches  and  poverty  affect  the  estimate  of  sacrifice  involved 
in  the  use  of  goods.  The  more  highly  the  person  is  able  to 
value  his  own  time,  because  of  his  riches,  income,  etc.,  the 
more  highly  he  values  the  earlier  uses  of  duplicates  to  save 
his  time,  and  the  less  highly  he  values  the  later  uses  of  goods 
which  tax  his  time.  Each  article  in  the  scanty  belongings 
of  the  poor  is  used  a  great  deal ;  each  article  in  the  abundant 
belongings  of  the  rich  is  used  very  little,  and  the  goods  of 
the  middle  class  occupy  positions  ranging  between  these  ex- 
tremes. 

§  4.  Sacrifice  involved  in  common  use  by  several  users. 
It  often  may  happen  that  the  further  uses  contained  in  goods 
may  be  taken  by  another  person,  possibly  by  several,  each  of 
whom  may  bring  to  the  use  his  freshest  powers.  This  may 
enhance  the  usefulness  of  the  good,  but  again  sacrifice  may 
result  from  the  inconvenience  of  common  use,  and  sooner  or 
later  the  outlay-value  exceeds  the  gross  income-value  of  the 
uses  thus  secured.  A  book  stands  many  hours  untouched  on 
the  shelves  of  the  library ;  it  has  potential  uses  for  some  one 
during  every  minute  of  the  twenty-four  hours  but  they  can 
be  secured  only  with  inconvenience.  When,  as  often  hap- 
pens, two  or  more  persons  wish  to  use  the  book  at  the  same 


Ch.  12] 


THE  PRINCIPLE  OF  PROPORTIONALITY 


12d 


hour,  time  and  energy  are  wasted.  The  greatest  net  uses, 
therefore,  are  seen  to  be  to  the  first  user  and  in  the  first  hour, 
for  these  uses  cost  the  least  time  and  trouble.  If  the  mem- 
bers of  a  family  will  take  turns,  one  chair  will  serve  for  all 
of  them ;  but  if  all  are  to  be  able  to  sit  down  together,  a  chair 
must  be  provided  for  each.  Often  it  will  happen  that  only 
one  chair  is  in  use,  the  other  nine  chairs  being  valued  only 
for  their  potential  uses,  I  knew  two  young  men  who  owned 
a  dress-coat  in  partnership,  and  as  they  had  different  even- 
ings free  from  business  all  went  well  until  both  were  invited 
to  a  reception  which  both  were  very  eager  to  attend.  In  tene- 
ment houses  there  are  sometimes  let  to  lodgers  beds  or  bunks 
that  are  never  allowed  to  get  cold,  men  working  in  the  day 
occupying  them  by  night,  and  men  working  by  night  sleeping 
in  them  by  day. 

§  5.  Gross  and  net  uses.  In  cases  of  this  kind  each  use 
of  the  chair,  or  the  book,  etc.,  is  technically  the  same  as  every 
other  use,  but  economically  these  uses  must  be  looked  upon 
as  a  series  of  unlike  valuation-magnitudes.     The   value  of 

each  use  is  a  net  amount 
resulting  from  subtracting 
the  outlay  from  the  in- 
come-value. Even  if  the 
income-values  remained  un- 
diminished by  bringing  in 
new  uses,  the  outlay-values 
would  be  increasing,  and 
the  net  use-value  corre- 
spondingly lessening.  A 
point  is  reached  where  the  net  value  of  the  use  falls  to  zero. 
Thus  in  Figure  20  if  on  the  line  BB^  be  represented  the  height 
of  successive  gross  uses  and  on  the  line  CB''  the  height  of  the 
successive  outlays,  net  uses  are  B^CS  B^C",  etc.,  until  at  B^ 
there  is  no  further  net  use. 

§  6.  The  doctrine  of  separable  uses.  "We  may  think  of 
the  use  of  an  object  not  as  one  undivided  whole,  but  as  a 


Fio.   20.     Geoss  and  Net  Uses. 


126  USANCE  AND  RENT  [Pt.1T 

group  of  uses,  separable  each  from  the  other.  Likewise  any 
one  of  these  uses  is  separable  from  the  use-bearer  considered 
as  a  concrete  object.  Every  economic  good,  the  use  of  which 
can  be  spread  throughout  a  period  of  time,  may  be  looked 
upon  as  consisting  of  groups  of  uses.  The  simplest  case  of 
this  results  from  mere  physical  divisibility.  A  basketful  of 
peaches  is  eaten  piece  by  piece;  each  peach  may  be  counted 
as  one  use.  In  this  case  the  use  is  consumptive :  it  is  not  sep- 
arable from  the  using  up  of  the  use-bearer  itself. 

The  truly  separable  use,  however,  is  found  in  the  case  of 
a  durable  agent  which  continues  through  a  period  of  time  to 
render  a  series  of  durative  uses.  A  very  perfect  example  is 
a  diamond  necklace,  the  sparkle  and  charm  of  which  is  a  use 
which  is  absolutely  without  detriment  to  the  use-bearer  (i.e., 
the  necklace,  tho  perhaps  not  to  the  wearer).  Many  agents 
have  this  enduring  quality  more  or  less  fully  (see  Chapter 
11  on  Consumption  and  Duration),  and  in  all  such  cases  the 
durative  use  may  be  treated  practically  and  theoretically  in 
economics  as  something  separable  from  the  use-bearer,  in  mat- 
ters of  valuation,  of  trade,  and  of  price.  The  peaches  may 
be  gathered  without  harming  the  fitness  of  the  trees  to  pro- 
duce another  crop.  Shelter  is  furnished,  once  the  house  is 
buUt,  without  destroying  the  house  more  than  disuse  would, 
if  it  stood  tenantless.  The  horse  is  the  better  if  driven  mod- 
erately each  day,  and  the  carriage  lasts  for  years.  In  every 
such  case,  the  use  is  something  different  from  the  "using  up" 
of  a  limited  number  of  goods,  for  there  is  left  in  the  use-bearer 
the  power  to  go  on  yielding  indefinitely  some  more  of  the 
same  product  or  use  if  it  is  kept  in  repair. 

Some  of  the  uses  contained  in  a  use-bearer  may  be  actual 
or  realized ;  others  may  be  and  may  remain  merely  potential. 
Or  they  may  all  be  realized  in  the  course  of  a  period  of  time, 
at  the  end  of  which  the  good  is  entirely  consumed  or  worn 
out.  The  uses  of  a  suit  of  clothes,  for  example,  may  be 
realized  only  day  by  day  for  a  considerable  period.  Some 
men  go  on  wearing  a  suit  until  it  is  almost  completely  worn 


Ch.  12] 


THE  PRINCIPLE  OF  PROPORTIONALITY 


127 


out  before  discarding  it;  others  discard  clothing  while  there 
are  still  many  possibilities  of  use  in  it.  It  may  perhaps  be 
safely  asserted  that  the  great  majority  of  things  have  poten- 
tialities of  which  the  owner  for  one  reason  or  another  does 
not  avail  himself.  As  already  indicated,  it  does  not  pay  to 
squeeze  all  possible  uses  out  of  a  good.  Uses  8,  9,  etc.  (be- 
yond 7  in  Figure  20),  are  quite  possible  of  realization,  but  the 
attendant  inconvenience  or  sacrifice  is  so  great  that  they  are 
valueless,  and  they  will  be  ignored.  The  owner  will  not 
forego  his  sleep  because  he  dislikes  to  have  the  piano  go  unused 
through  the  hours  of  the  night. 

In  the  case  of  a  durable  good  circumstances  may  warrant 
a  very  slight  utilization  at  one  time  and  a  very  much  more 
complete  utilization  at  another.  The  factory  which  has  been 
running  on  half-time  may  later  be  operated  day  and  night 
to  meet  a  great  increase  in  demand, 

§  7.  More  intensive  utilization.  The  uses  of  a  good  at  a 
given  time  are  actual  or  realized  up  to  a  point,  limit,  or 
margin  beyond  which  further  uses  would  not 
be  worth  the  outlay  of  effort  or  of  other  goods. 
This  point  in  the  utilization  is  called  the  in- 
tensive margin.  Using  the  thing  more  and 
more,  while  uniting  other  things  with  it,  is 
using  it  more  intensively.  Getting  more  use 
out  of  the  book  by  effort,  out  of  the  farm  by 
applying  more  fertilizer,  out  of  the  factory 
by  employing  two  or  three  shifts  and  work- 
ing longer  hours,  out  of  the  house  by  putting  ^^^, 
more  people  in  it,  is  intensive  utilization 
The  superior  uses  come  easily,  naturally ;  the  inferior  ones  are 
to  be  secured  only  with  increasing  difficulty.  "When  some 
change  comes — such  as  an  increase  in  demand  for  the  product 
of  an  agent — which  causes  that  agent  to  be  more  intensively 

*  The  use  a  is  the  highest  in  the  sense  that  it  is  the  most  easily 
obtained.  Like  results  are  to  be  had  by  the  use  of  b  to  g  successively 
only  at  greater  costs;  or  less  valuable  results  at  the  same  costs. 


1 

V 

a 

b 

1 

c 

1 

d 

e 

1 

f 

^ 

9    J 

Highest 
Uses 


\  Grade 


Uses 


21.  Inten- 
sive Grades  or 
Uses.* 


128  USANCE  AND  RENT  [Pt.  II 

utilized,  this  change  is  said  to  have  lowered  the  (intensive) 
margin  of  utilization.  The  inferior  grades  of  uses  are  being 
resorted  to. 

§  8.  More  extensive  utilization.  This  same  change  of  de- 
mand may,  however,  bring  about  a  simultaneous  change  of  a 
different  sort.  If  there  are  various  agents  of  different  de- 
grees of  excellence,  and  only  the  better  grades  are  being  used 
to  meet  this  particular  demand,  then  an  increase  in  the  de- 
mand is  likly  to  result  not  only  in  a  more  intensive  utiliza- 
tion of  the  superior  agents,  but  also  in  the  calling  of  some 
of  the  inferior  agents  into  use.  The  best  agents  that  are 
available  at  the  time  are  used  first,  but  as  they  are  more  in- 
tensively used,  there  is  increasing  inconvenience.  This  may 
be  relieved  by  using  either  physical  duplicates  of  the  better 
agents  or  by  using  inferior  agents.  If  there  is  more  than  one 
of  a  certain  kind  of  agents,  the  duplicates  are  distributed  so 
as  to  be  where  most  valued  by  the  owner.  A  man  having 
two  umbrellas  keeps  one  at  his  office  and  the  other  at  home; 
a  student  having  two  books  of  the  same  kind  keeps  one  at  his 
room  and  the  other  at  the  university;  a  farmer  having  two 
hoes  keeps  one  at  the  barn  and  the  other  in  a  distant  field, 
and  by  this  method  the  additional  units  have  higher  uses  than 
if  they  were  used  in  the  same  way  or  at  the  same  place  as  the 
earlier  units. 

It  may  finally  be  necessary  to  have  recourse  to  agents  which 
as  a  whole  are  inferior  to  the  other  agents,  but  whose  first 
uses  are  better  than  the  remaining  intensive  uses  of  the 
better  grades  of  agents.  This  employment  of  inferior  agents 
is  also  called  lowering  the  margin  of  utilization.  But  it  is  a 
different  margin  with  which  we  have  to  do — the  margin  be- 
tween superior  and  inferior  agents.  It  is  the  extensive  mar- 
gin. At  the  same  time  that  an  increase  in  demand  causes  the 
use  of  double  shifts  in  the  efficient  factory,  another  fac- 
tory, of  inferior  efficiency,  which  has  been  completely  idle, 
may  be  brought  into  use,  tho  possibly  not  to  its  full  capac- 
ity.   There  has  then  occurred  a  change  or  lowering  of  both 


Ch.  121 


THE  PRINCIPLE  OF  PROPORTIONALITY 


129 


margins.  At  the  same  time  that  the  cultivation  becomes  more 
intensive  on  the  better  fields,  it  becomes  more  extensive  if 
there  are  other  areas  which  have  just  come  to  have  valuable 
uses.  The  intensive  margin  of  use  is  in  the  particular  thing ; 
the  extensive  margin  is  the  line  between  the  superior  and  the 
inferior  good.  The  inferior  agent  which  is  not  utilized  is 
spoken  of  as  "below"  or  "beyond"  or  "outside  of"  the  (ex- 
tensive) margin  of  utilization.  The  interrelations  between 
the  two  margins  are  shown  in  the  diagram. 

Intensiveness  and  exten-  m 

siveness  of  utilization  are 
relative  terms.  The  utili- 
zation of  one  machine  or  of 
one  piece  of  land  is  more 
or  less  intensive  as  com- 
pared with  another  when 
more  of  other  agents  (e.g., 
labor)  is  used  with  or  upon 
it;  or  the  utilization  of  an 
agent  becomes  more  or  less 
intensive  than  it  was  be- 
fore if  more  or  less  com-  pia 
plementary  agents  are  used 
than  before.  One  might  say  that  the  use  of  an  agent  is 
intensive  in  one  place  as  compared  with  another  (e.g.,  land  in 
New  Jersey  compared  with  that  in  Kansas),  yet  extensive  as 
compared  with  still  another  place  (with  that  in  western 
Europe).  In  the  same  way  extensive  utilization  is  rela- 
tive. 

*  The  rectangles,  M,  N,  O,  P,  Q,  represent  agents  of  various  grades, 
each  consisting  of  strata  of  uses.  The  best  uses  are  a,  b,  and  c,  in  M; 
but  after  M  has  been  utilized  intensively  down  to  d,  N  will  begin  to  be 
utilized  at  its  highest  point.  When  utilization  goes  down  to  f,  0  comes 
into  use,  and  so  on.  Therefore  it  will  be  seen  that  until  the  intensive 
margin  takes  in  d,  M  is  on  the  extreme  margin  of  utilization,  and  N  is 
just  outside  it;  when  the  intensive  margin  falls  to  g  and  h,  P  is  inside 
the  extensive  margin,  and  Q  is  just  outside. 


a 

:3 

b 

C5 

c 

N 

1 

d 

e 

e 

O 

5 

1 

f 
9 

f 
9 

f 
9 

P 
9 

^ 

h 

h 

h 

h 

Q 

1 

1 

1 

1 

1 

Ej('ten3/ye   Grades  of  Uses 

22.     Intensive      and      Estensivk 
Grades  or  Uses.* 


130  USANCE  AND  RENT  [Px.II 

§  9.  Application  of  complementary  agents  at  the  two 
margins.  It  is  not  our  purpose  at  this  point  ^  to  empliasize 
the  fact  (important  as  it  is)  that  changes  of  demand  occur, 
and  that  these  changes  cause  the  best  economic  proportion  to 
change.  Rather  we  use  illustrations  of  change  to  make  clear 
that  in  any  given  set  of  conditions  there  is  a  best  proportion 
in  which  to  combine  agents.  There  is  a  right  degree  of  eco- 
nomic utilization  in  that  particular  situation.  Where  this 
best  proportion  is  attained,  is  a  point  of  economic  equilibrium, 
in  the  sense  that  there  is  in  the  situation  itself  (and  until 
some  other  conditions  change,  as  invention,  increased  demand, 
etc.)  no  motive  to  change  the  proportion.  In  such  a  case  the 
effort  is  made  to  repeat  the  process,  to  maintain  just  that 
proportion  which  has  been  found  to  be  on  the  whole  best.  If 
either  of  two  complementary  agents  is  used  in  greater  or  less 
amount  than  this  best  proportion,  a  loss  results,  something  less 
than  the  possible  maximum  of  value  is  obtained. 

Now  the  case  of  the  two  margins  always  occurs  when  one 
of  the  complementary  agents  is  present  in  more  than  one  qual- 
ity or  grade,  as  respects  stuff,  form,  or  place.  Then  the  supply 
of  the  complementary  agent  is  distributed  over  the  different 
grades  of  uses,  now  to  the  lower  uses  in  the  better  agent,  now 
to  the  upper  uses  of  the  poorer  grades.  In  this  way  the  ef- 
fectiveness of  each  unit  of  the  complementary  agent  is  kept 
equal  on  the  intensive  and  on  the  extensive  margins  of  utiliza- 
tion of  goods.  As  the  value  of  the  added  product  in  the  more 
intensive  use  of  a  particular  agent  decreases,  a  point  finally  is 
reached  where  it  is  better  to  transfer  the  outlay  to  another 
agent,  to  sliift  from  the  intensive  to  the  extensive  margin,  by 
going  over  to  the  use  of  another  field  or  of  another  machine  not 
so  good.  As  the  effectiveness  of  the  labor,  of  the  machinery,  of 
the  lands,  of  complementary  agents  of  every  kind,  that  men 
have  to  apply  to  two  grades  of  another  agent  is  being  com- 
pared constantly,  the  uses  of  the  complementary  agents  are 

1  We  are  studying  here  the  static  problem.  In  Part  VI,  chs.  32-39 
the  dynamic  problem  ia  much  more  fully  treated. 


Ch.  12]  THE  PRINCIPLE  OF  PROPORTIONALITY  131 

distributed  along  the  two  margins.  The  margin  of  utilization 
is  marked  by  a  line  of  uses  valued  at  zero.  When  used  to 
that  point  the  total  value  obtainable  from  the  agent  is  at  its 
maximum.  If  utilization  is  less  intensive  the  value  of  the  last 
possible  use  is  lost,  and  if  it  is  more  intensive  there  is  a  net 
loss  on  the  outlay. 

§  10.  The  principle  of  proportionality  in  agriculture. 
The  principle  of  proportionality  applies  to  the  use  of  agents 
in  all  kinds  of  business  and  determines  the  degree  of  their 
economic  utilization.  This  general  principle  was  first  for- 
mulated in  reference  to  land  in  agriculture,  and  for  a  long 
time  was  supposed  to  be  peculiar  to  the  use  of  that  class  of 
agents.^ 

The  use  of  land  in  agriculture  is  conditioned  on  the  pres- 
ence of  a  top-soil  of  suitable  mineral  elements  and  texture, 
and  on  a  proper  surface,  exposed  to  light,  air,  and  sun,  with 
the  necessary  climatic  influences  of  temperature,  moisture, 
etc.  It  was  long  ago  seen  that  on  such  a  piece  of  land  a 
crop  larger  than  usual  could  be  obtained  only  with  greater 
effort  or  expenditure.^ 

It  is  obvious  to  every  farmer  and  gardener  that  he  cannot 
indefinitely  increase  his  crop,  that  two  men  cannot  always 
produce  twice  as  much  as  one  man  on  a  fixed  area  of  land, 
and  that  in  general  the  product  does  not  vary  either  up  or 
down  in  proportion  to  the  labor  and  materials  applied.  In- 
stead of  20  bushels  to  the  acre,  25  or  30  bushels  might  be 
raised,  but  it  would  require  more  plowing,  labor,  seed,  fer- 
tilizer, and  other  expenses,  in  value  greater  than  the  addition 

2  Of  this  supposed  peculiarity  various  explanations  were  given,  such  as 
the  chemical  qualities  of  the  soil,  and  as  the  assumed  durativeness  of 
agricultural  land,  etc. 

8  Note  the  significance  of  the  phrase  "larger  than  usual."  Surely 
the  crops  may  be  larger  some  years  than  others,  and  especially  large 
in  those  years  when  there  is  remarkably  favorable  union  of  rainfall, 
temperature,  freedom  from  pests,  etc.  "Larger  than  usual"  means 
larger  than  on  the  same,  or  on  like,  land  under  circumstances  alike 
except  in  respect  to  intensiveness  of  cultivation. 


132  USANCE  AND  RENT  [Pt.  II 

to  the  value  of  the  crop.  On  the  other  hand  a  moderate  de- 
gree of  thoroness  of  cultivation  is  necessary  to  get  any  results 
worth  while;  and,  besides,  if  a  small  crop  is  raised,  the  value 
of  most  of  the  uses  of  the  land  for  that  season  would  be  en- 
tirely thrown  away.  Only  5  or  10  bushels  per  acre  might  be 
raised  with  less  expense  per  bushel  merely  for  labor  and  ma- 
terial, but  there  would  be  left  no  remainder  to  apply  to  the 
value  of  the  land-uses.  Between  the  wastefully  small  crop 
of  1  bushel  and  the  wastefully  large  crop  of  100  bushels  an 
acre,  there  lies  a  point,  more  or  less  correctly  ascertained  by 
experience,  where  the  largest  net  result  is  obtained,  a  point 
where  by  aiming  to  raise  either  less  or  more  the  man  in  charge 
gets  a  smaller  net  return  (surplus  of  total  price  over  ex- 
penses) . 

§  11.  Intensive  use  of  ground  space.  The  principle  of 
proportionality  applies  to  ground-space  in  all  industries. 
Some  space  is  needed  for  any  activity,  even  for  mere  existence, 
and  a  limited  area  cannot  afford  an  unlimited  number  of  uses. 
If  a  large  library  is  accumulated  in  one  small  room,  a  point 
is  reached  where  there  is  scarcely  room  to  stand,  and  much 
energy  is  wasted  in  trying  to  find  the  books.  In  a  university 
the  psychical  product,  education,  may  be  limited  by  the  need 
of  space.  School-rooms,  laboratories,  and  college  class-rooms, 
if  used  all  day  and  all  night,  would  accommodate  several 
times  as  many  students  as  they  do;  but  the  "wee  sma'  hours" 
would  not  be  popular;  and,  therefore,  as  students  increase, 
buildings  must  be  added.  One  cannot  conveniently  increase 
the  business  of  a  lumber-yard  without  a  larger  yard-space, 
or  of  a  factory  without  a  larger  floor-space.  But  the  added 
space  may  be  gotten  by  spreading  horizontally  or  piling  up 
vertically.  Even  in  agriculture  vertical  addition  is  pos- 
sible by  the  use  of  greenhouses  in  which  mushrooms  are 
grown  below  the  tables  and  tomatoes  above,  and  where  arti- 
ficial heat  gives  a  more  intensive  utilization  throughout  the 
winter.  Therefore,  with  more  space  and  also  more  time  a 
single  foot  of  ground  can  be  made  to  yield  half  a  dozen  crops 


CH.  12]  THE  PRIKCIPLE  OF  PROPORTlOi^ALlTY  133 

in  the  year.  In  the  production  of  food,  however,  on  account 
of  the  need  of  sun,  light,  and  air,  the  limits  of  space  are  more 
quickly  felt,  and  are  less  elastic  than  in  most  other  industries ; 
the  difference,  however,  is  one  of  degree,  and  not  of  kind.  In 
mercantile,  commercial,  and  manufacturing  businesses  10 
acres  or  60  acres  of  usable  floor-space  may  be  had  by  putting 
a  building  of  that  number  of  stories  upon  an  acre  of  land,  and 
installing  elevators  and  moving  stairway's,  parcel  carriers, 
and  telephones.  Not  only  is  the  initial  cost  high,  but  the  cost 
of  maintenance  likewise,  and  it  is  economically  warranted 
only  when  laud-space  is  very  high  priced.  Business  adapts 
itself  to  this  law,  but  does  not  escape  its  operation.  Neither 
the  law  of  gravitation  nor  the  principle  (or  law)  of  propor- 
tionality is  violated  or  broken  when  materials  are  lifted  to 
build  the  upper  stories.  Both  ''laws"  are  at  work,  even  when 
the  building  is  rising  from  the  ground. 

§  12.  Intensive  use  of  tools  and  implements.  All  the  im- 
plements used  in  agriculture  are  subject  to  the  limitation  of 
the  principle  of  proportionality.  Why  will  not  one  hoe,  one 
rake,  one  plow,  one  scythe,  one  horse,  one  wagon,  do  for  all 
the  farmers  of  a  neighborhood?  It  might,  in  many  cases, 
but  it  would  be  with  much  labor  and  time  in  carrying  the 
things  back  and  forth  and  in  waiting  for  others  to  get  through 
using  them;  it  would  require  work  to  be  continued  all  night, 
on  Sundays  and  on  holidays,  and  even  then  the  plowing,  hoe- 
ing, harvesting,  and  other  farm  operations  could  not  be  per- 
formed when  most  needed.  Even  now  there  is  much  loss  in 
just  these  w-ays  because,  tho  every  farmer  has  at  least  one, 
and  some  have  many,  of  these  tools,  there  are  brief  periods 
when  there  are  not  tools  enough.  Why,  then,  not  have  more 
tools?  Because  they  cost.  Between  the  extremes  of  no  tools 
and  a  multitude  a  balance  is  struck  at  a  point  where  the  last 
additional  tool  adds  to  the  price  of  the  crop  at  least  as  much 
as  the  tool  costs.  The  mode  of  estimating  these  costs  we  have 
later  to  study  more  closely. 

In  manufacture,  whether  by  hand  tools  in  small  shops  or 


134  USANCE  AND  RENT  [Pt.  II 

by  machinery,  in  transportation,  whether  by  boat  or  railroad, 
there  is,  in  the  mind  of  the  manager,  the  same  ideal  point  of 
equilibrium  between  the  price  of  the  uses  to  be  added  and  the 
price  of  the  other  agents  (labor,  tools,  materials)  that  must  be 
expended  to  secure  the  additional  product.  To  do  nothing 
with  a  tool,  implement,  machine,  for  the  purpose  of  saving  the 
things  that  would  have  to  be  used  with  it,  is  to  lose  the  use 
of  it. 

§  13.  Intensive  development  of  water-power.  In  the  de- 
velopment of  water-power  it  is  possible  to  combine  the  original 
source  of  water-supply  with  various  kinds  of  other  agents  to 
generate  more  or  less  power.  A  waterfall  may  be  made  to 
yield,  perhaps,  25  horse-power  daily  with  a  crude  undershot 
wheel,  75  more  horse-power  if  a  dam  is  constructed  and  an 
overshot  wheel  is  used,  150  more  horse-power  if  an  iron  tur- 
bine replaces  the  wooden  wheel,  and  500  more  horse-power  if 
a  large  reservoir  is  built  a  half  mile  distant  and  the  water 
conducted  under  pressure  to  a  reaction  wheel  at  the  foot  of  the 
fall.  The  last  is  technically  the  most  efficient,  but  economi- 
cally its  large  cost  will  not  be  warranted  until  there  is  a  large 
demand  for  power  at  that  place. 

§  14.  Bearings  of  the  principle.  It  is  plain  that  this  prin- 
ciple of  proportionality  must  be  taken  account  of  in  all  prac- 
tical affairs  by  those  who  are  directing  the  processes  of  pro- 
ductive industry,  whether  on  a  large  or  on  a  small  scale. 
Their  problem  is  both  technical  and  economic.  They  must 
make  effective  technical  use  of  goods,  and  they  must  combine 
things  in  ways  that  will  pay.  To  the  student  of  economics 
a  clear  understanding  of  this  most  fundamental  principle  of 
proportionality  is  essential  to  the  solution  of  the  complex 
problems  of  valuation.  Things  are  not  valued  in  isolation 
from  each  other.  The  great  mass  of  complementary  agents 
act  and  react  upon  each  other.  The  valuation  put  upon  one 
agent  is  due  in  part  to  the  presence  in  certain  proportions 
of  other  agents.  Many  evidences  of  this  truth  will  appear  to 
us  as  our  study  proceeds. 


CHAPTER  13 
THE  CONCEPT  OF  USANCE-VALUE 

§1,  Usance  and  usufruct:  definitions.  §2.  Usance- value  of  agents 
yielding  products  of  like  grade.  §  3.  Usance-value  of  agents  yielding 
products  of  different  grades.  §  4.  Effect  of  the  presence  of  one  agent 
upon  the  usance-value  of  another.  §  6.  Usance-value  determining  utili- 
zation. §  6,  Time  as  a  factor  in  usance-value.  §  7.  Usance-value  and 
the  margin  of  utilization.     §  8,  Usance-value  of  complementary  agents. 

§1.    Usance  and  usufruct:  definitions.    As  the  use  of  a 

consumptive  good  involves  the  using  up  of  the  good  itself,  the 
value  of  the  consumptive  use  is  identical  with  the  value  of 
the  good  itself.  But  when  the  uses  are  separable,  the  problem 
of  value  presents  more  complicated  aspects.  The  series  of 
separable  uses  of  which  a  durative  good  consists  may  be 
called  its  usance.  The  concrete  object  which  yields  the  uses 
may,  by  repairs  and  replacement,  be  treated  as  a  durative 
use-bearer,  capable  of  yielding  either  an  unending  or  a 
definitely  limited  series  of  like  uses.  This  theoretical  pos- 
sibility appears  in  a  number  of  practical  problems.  It  is 
involved  in  the  careful  use  of  any  durative  agent  by  the 
owner  himself.  It  is  the  important  consideration  in  the  defi- 
nition of  the  legal  right  of  usufruct.  In  law,  usufruct  is  * '  the 
right  of  using  and  enjoying  the  income  of  an  estate  or  other 
thing  belonging  to  another,  without  impairing  the  substance." 
One  heir  may  have  the  usufruct  for  a  term  of  years  and  an- 
other heir  have  meantime  only  the  reversionary  right,  which, 
however,  entitles  him  to  sue  for  waste  if  the  substance  of  the 
estate  is  being  impaired,  as  by  cutting  standing  timber,  neg- 
lecting repairs,  etc.  The  tenant  of  a  rented  farm  has  the 
usufruct,  but  must  not  impair  (with  minor  exceptions)  the 
substance  of  the  farm.     The  value  of  the  usufruct  in  any 

135 


186  USANCE  AND  RENT  [Pt.  II 

given  period  may  be  called  the  usufructuary  value,  or  usance- 
value,  as  distinct  from  the  value  of  the  estate,  or  of  the  con- 
crete object.  We  have  now  to  consider  how  the  usance-value 
is  related  to  the  value  of  the  products,  be  they  indirect  goods, 
direct  goods,  or  psychic  income. 

§  2.  Usance- value  of  agents  yielding  products  of  like 
grade.  Consider  the  simple  case  where  the  products  are 
themselves  immediately  enjoyable  goods,  such  as  fruit.  The 
value  of  the  use  of  the  tree  is  simply  the  net-value  (deduct- 
ing costs  of  cultivation,  etc.)  of  the  fruit  that  the  tree  yields 
in  the  season.  It  is  clear  that  if  the  farmer  has  his  choice 
between  a  tree  that  yields  30  bushels  and  one  that  yields  20 
bushels  of  like  apples  (this  being  the  net  difference  after  de- 
ducting costs),  he  will  value  the  season's  yields  of  the  two 
trees  in  the  ratio  of  3  to  2.  The  tree  yielding  the  more  fruit 
is  counted  by  so  much  the  better,  and  relative  values  are  at 
any  given  moment  expressed  by  the  relative  quantities  of 
products. 

In  a  like  manner,  orchards  (groups  of  agents)  may  be  eval- 
uated. In  the  San  Gabriel  valley,  as  in  other  parts  of  Cali- 
fornia, there  is  a  frostless  belt,  marked  off  by  a  narrow  belt  of 
uncertain  climate  from  the  lands  where,  because  of  the  prob- 
ability of  frost,  it  is  quite  unsafe  to  attempt  to  cultivate  the 
delicate  orange-tree  and  other  semi-tropical  plants.  The 
usance-values  of  the  orchards  show  gradations  corresponding 
"with  the  average  amount  of  net  products  from  the  frostless  belt 
to  the  region  of  frost.  In  manifold  ways  differences  in  geolog- 
ical formation  affect  the  use  of  land  and  the  success  of  many 
industries.  On  one  side  of  a  little  creek  may  be  limestone 
land,  on  the  other  shale,  and  the  limestone  land  produces 
larger  crops  and  therefore  has  the  greater  value.  The  usance- 
value  is  plainly  a  reflection  or  derivative  of  the  net-value  of 
the  products  yielded  during  the  period,  and  if  other  things 
are  equal  the  usance-values  of  two  use-bearers  in  the  same 
market  will  differ  as  do  the  quantities  of  like  uses  which  they 
yield. 


Ch.  13]  THE  CONCEPT  OF  USANCE-VALUE  137 

§  3.  Usance-values  of  agents  yielding  products  of  differ- 
ent grades.  If  now  two  agents  be  compared  whose  products 
are  equal  in  quantity  but  of  different  grade  or  quality,  the 
agents  will  obviously  have  different  usance-values  correspond- 
ing with  the  differences  in  quality.  Take  a  well-known  ex- 
ample in  the  case  of  land.  A  peculiar  mineral  quality  in  the 
soil  of  a  vineyard  may  impart  to  wine  a  choice  flavor  that  can 
at  once  be  recognized  by  experts,  while  other  fields,  distant 
but  a  few  rods,  cannot  by  any  effort  be  made  to  produce  wine 
of  the  same  rare  quality.  There  is  said  to  be  a  marked  dif- 
ference in  the  success  of  orchards  and  of  vineyards  lying  only 
a  short  distance  apart  on  the  shores  of  the  larger  lakes  of 
New  York.  Nearness  to  the  water  moderates  the  tempera- 
ture, often  prevents  frosts,  and  hence  insures  the  ripening  and 
enhances  the  quality  as  well  as  increases  the  quantity  of  the 
fruit.  "Where  the  peculiar  nature,  slope,  or  location  of  the 
land  is  found  to  be  the  cause  of  the  exceptional  quality  of  its 
fruits,  the  land  acquires  an  exceptional  usance-value  as  com- 
pared with  ordinary  land  in  the  neighborhood. 

It  is  the  same  with  the  usance-value  of  all  other  material 
agents.  The  common  nag  and  the  thorobred  horse,  the  loom 
for  weaving  rag  carpets  and  one  for  weaving  complex  designs 
in  silk,  the  scow  and  the  yacht,  are  yielding  uses  which  have 
differing  values  reflected  to  them  from  their  final  products, 
and  accordingly  they  vary  in  usance-value.  The  same  prin- 
ciple applies  in  the  case  of  human  services.  The  labor-in- 
come or  the  wage  obtained  by  a  man  for  his  labor  for  a 
definite  period  is  a  reflection  of  the  value  of  that  labor  to  his 
employer,  and  eventually  to  the  user  of  the  product.  In  all 
cases  the  usance-value  is  a  derivative. 

§  4.  Effect  of  the  presence  of  one  agent  upon  the  usance- 
value  of  another.  Let  us  now  consider  the  effect  which  the 
presence  of  agents  of  inferior  quality  may  have  upon  the 
usance-value  of  better  agents.  It  is  clear  (see  Chapter  12) 
that  if  two  agents  are  of  different  grades  of  excellence,  the 
better  agent  will  be  first  used;  but  when  there  is  sufficient 


138  USANCE  AND  RENT  [Pt.II 

demand,  the  less  efficient  agent  will  be  pressed  into  service. 
Tho  inferior  as  a  whole,  it  has  uses  which  are  better  than 
the  lower  grades  of  uses  of  the  better  agent,  and  we  can 
speak  of  these  uses  as  competing  with,  or  as  being  substituted 
for,  the  more  intensive  uses  of  the  better  agent.  Regarding 
the  various  uses  in  both  objects  as  separable,  we  see  that  the 
total  supply  available  to  meet  a  given  demand  is  increased  by 
the  presence  of  the  inferior  agent.  The  use  of  the  inferior 
agent  limits  the  utilization  of  the  one  of  better  grade,  and 
therefore  limits  or  lessens  its  usance-value.  If  there  is  but 
one  grade  of  agent,  it  is  necessarily  valued  without  reference 
to  any  lower  grade.  There  may  be  at  first  enough  of  the 
higher  grade  of  agents  to  produce  all  the  fruit  wanted  of  the 
better  quality.  If,  then,  there  is  an  increasing  demand,  and 
the  additional  yield  can  be  secured  only  with  more  intensive 
utilization,  the  value  of  the  product  rises.  The  presence  of 
inferior  grades,  however,  limits  that  rise,  because  use  can  be 
shifted  to  them.  Within  the  limits  of  substitution  the  poorer 
grades  reduce  somewhat  the  demand  for  the  better  grades. 
The  usance-value  of  the  better  agents  is  due  primarily  to  their 
scarcity  and  (not  less  important)  to  the  scarcity  of  the  more 
effective  uses  in  those  agents;  but  the  substitutable  uses  in 
other  available  agents  have  their  part  in  determining  the  par- 
ticular level  of  valuation  in  any  economic  situation. 

§  5.  Usance-value  determining  utilization.  Both  the 
quantity  and  the  quality  of  products  thus  unite  to  determine 
the  usance-value  of  an  agent.  A  smaller  crop  of  apples  of 
better  flavor  on  one  tree  may  equal  or  exceed  in  value  the 
larger  crop  of  another  tree.  In  this  case  usance-values  of 
similar  things  are  compared.  But  through  the  value  of  the 
products  they  afford,  very  dissimilar  classes  of  goods  may  be 
compared :  the  apple  orchard  and  the  peach  orchard,  the  corn 
field  and  the  field  of  potatoes.  The  constant  comparison  of 
usance-values  leads  to  the  applying  of  each  agent  to  the  par- 
ticular use  in  which  it  proves  itself  to  have  products  of  the 
highest  value,  and  to  the  shifting  of  the  use  when  a  sufficient 


Ch.  13]  THE  CONCEPT  OF  USANCE-VALUE  139 

change  of  value  takes  place  in  the  product.  For  example,  a 
field  used  for  corn  becomes,  as  population  grows,  worth  more 
for  market  gardening  than  for  residence  sites,  and  later  be- 
comes worth  still  more  as  a  business  location  at  the  center  of 
trade.  The  land  has  various  possible  alternative  uses  at  any 
moment,  but  that  one  is  to  be  chosen  which  secures  the  highest 
net  yield. 

§  6.  Time  as  a  factor  in  usance-value.  Each  instant  that 
an  agent  is  in  use  may,  if  we  choose,  be  counted  a  separate 
use,  and  usmice  consists  of  the  sum,  or  succession,  of  net  uses 
yielded  in  some  limited  period  of  time,  as  a  day,  a  week,  or 
a  single  season.  It  takes  time  for  the  separate  uses  to  be 
realized.  The  series  of  uses  bound  up  in  an  agent  can  not 
be  secured  at  any  single  moment.  If  a  fruit-tree  were  per- 
manent, and  the  owner  could  wait  through  eternity  for  its 
yield,  he  would  get  an  infinite  yield  of  fruit.  But  in  any 
finite  period,  there  can  be  only  a  limited  yield.  When  uses 
of  different  periods  are  compared,  as  this  year's  use  and  the 
next  year's  use,  or  the  use  during  some  year  in  the  more  dis- 
tant future,  another  problem  is  involved,  that  of  time-value. 
Moreover,  time  is  an  element  in  the  comparison  of  the  present 
values  of  products  that  are  of  various  degrees  of  ripeness  or 
readiness.  A  wagon  can  be  used  in  June  for  hauling  a  fam- 
ily to  the  circus  or  for  hauling  a  load  of  wood  to  the  home 
to  cook  a  meal  the  next  December ;  or  a  horse  may  be  used  for 
an  afternoon's  drive,  or  for  dragging  timbers  to  build  a  cot- 
tage to  be  used  for  a  life-time.  Here  the  usance  is  in  the 
present,  whereas  one  of  the  alternative  uses  is  present  and 
direct,  and  the  other  is  indirect,  resulting  in  future  income. 
Inevitably  the  element  of  time  enters  in  most  cases  into  the 
estimate  of  usance-value.  We  must,  however,  postpone  for  a 
few  chapters  tlie  fuller  analysis  of  this  factor. 

§  7.  Usance-value  and  the  margin  of  utilization.  Usance- 
value,  let  us  here  recall,  is  a  summation  of  the  values  of  the 
separable  uses  contained  in  a  good  treated  as  durable  (that 
is,  kept  in  perfect  repair).    Its  amount  depends  therefore  on 


140  USANCE  AND  RENT  [Pt.  II 

the  values  of  the  various,  and  perhaps  numerous,  separable 
uses,  or  products,  some  of  them  direct  and  others  indirect. 
In  this  summation  are  the  values  both  of  actual  and  of  expected 
uses.  Merely  potential  uses  that,  in  the  existing  conditions, 
are  free  do  not  increase  the  usance-value.  Direct  goods  that 
were  free  may,  however,  become  valuable.  The  poorer  qual- 
ities of  fruit  that  have  been  allowed  to  decay  on  the  ground 
may  now  be  carefully  gathered,  while  the  better  qualities  are 
used  for  special  purposes.  The  total  usance-value  of  the  dura- 
tive  agent  (the  orchard),  the  value-summation  of  all  the  sepa- 
rable uses,  would  then  be  greater  than  it  was  before. 

In  the  same  way  when  the  agents  and  their  uses  are  indirect 
there  is  a  point  in  the  gradation  from  the  better  to  the  poorer 
agents  where  the  materials  and  forces  are  left  unused.  Be- 
yond or  below  that  point  the  uses  of  machines,  tools,  and  fields 
have  no  value,  except  for  some  prospective  use.  Outworn 
goods  in  manifold  forms,  old  pictures,  old  clothing,  having 
no  longer  charms  even  for  a  rummage  sale,  a  great  multitude 
of  things  unused  and  worthless,  differing  by  only  a  shade 
from  things  that  still  are  used  and  valued,  form  a  valueless 
margin  of  wealth.  Every  rubbish-heap,  rag-bag,  junk-shop, 
and  garret  contains  things  once  prized,  now  lingering  on  the 
margin  of  use  or  already  become  definitely  useless. 

Recall  that  there  is  an  intensive  margin  of  utilization, 
beyond  which  are  certain  potential  uses  in  the  things  that  we 
already  have,  which,  however,  in  the  existing  conditions,  lie 
outside  the  margin  of  utilization  and  of  value.  They  may 
become  valuable  through  any  one  of  many  changes  in  the 
economic  situation.  Their  use  now  would  involve  an  expendi- 
ture of  other  agents  (labor,  materials,  etc.)  that  have  a 
greater  value  than  the  product  would  have.  Economic  choice 
should  go  just  far  enough  and  not  too  far,  either  extensively 
or  intensively,  in  the  use  of  goods,  if  the  maximum  of  usance- 
value  is  to  be  attained. 

§  8.  Usance-value  of  complementary  agents.  In  the  fore- 
going discussion  we  have,  for  the  sake  of  simplicity,  spoken 


Cir.  13]  THE  CONCEPT  OF  USANCE- VALUE  141 

as  if  a  single  product  were  attributable  to  a  single  agent.  In 
reality  a  situation  as  simple  as  this  is  rare,  tho  it  may  occur. 
Almost  all  products  are  the  result  of  the  uses  of  two  or  more 
complementary  agents.^  When  two  or  more  agents  are  each 
indispensable  to  the  existence  of  a  valuable  product,  the  lack 
of  one  agent  makes  the  other  agents  valueless  for  that  one 
purpose.  The  product  cannot  in  any  case  be  physically  di- 
vided into  fractions  and  the  parts  ascribed  to  the  various 
agents  respectively.  But  the  valuation  imputable  to  each 
under  the  existing  conditions  results  from  the  demand  and 
supply  for  each  in  all  its  uses  together.  This  process  of  com- 
parison is  found  even  in  the  individual  economy.  Robinson 
Crusoe  had  to  choose  how  he  would  apportion  his  labor  (one 
good)  and  his  limited  stock  of  iron  (another  good)  to  make 
tools  (the  products).  He  would  not  apply  all  his  agents  to 
any  one  product  (as  hatchets),  but  he  would,  by  the  principle 
of  substitution,  apportion  the  agents  among  a  number  of  prod- 
ucts, hammers,  knives,  etc.  There  are  thus,  in  this  simple 
case,  several  series  of  evaluations.  First,  the  successive  units 
of  the  products  from  this  process,  as  for  example  the  hatchets, 
have  a  decreasing  importance.  Secondly,  the  successive  units 
of  labor  applied  to  this  one  product  would  be  limited  by  their 
value  for  other  uses.  Thirdly,  the  successive  units  of  iron 
would  have  less  value  applied  to  this  use  and  relatively  greater 
value  applied  to  different  products.  Each  use  is  chosen  in 
relation  to  all  the  alternative  uses  presented  to  choice  at  the 
moment,  and  a  scale  of  values  results  that  represents  the 
equilibrium  of  choice.  The  choices  may  be  made  in  a  very 
imperfect  way,  but  somehow  they  must  be  made  by  every  indi- 
vidual working  by  himself,  at  whatever  simple  task.  A  large 
part  of  these  choices  are  made  easy  through  habit,  custom, 
and  imitation,  by  which  the  general  scale  of  living  and  the  in- 
dustrial process  are  largely  ruled. 

When  men  come  together  to  trade  in  markets,  the  problem 
of  evaluating  complementary  agents  becomes  in  some  respects 

1  See  above  on  complementary  goods,  ch.  4,  sec.  5. 


142  USANCE  AND  RENT  [Pt.  II 

more  complex,  because  of  the  variety  of  labor  and  of  uses ;  but 
in  some  respects  it  is  easier,  because  of  the  existence  of  cur- 
rent prices  for  all  things,  serving  to  give  more  exact  expres- 
sion to  the  value  of  alternative  uses.  Flour  and  water  are 
needed  to  make  bread.^  Assume  that  a  loaf  of  bread  has  a 
value  of  10.  If  the  water  is  a  free  good,  the  flour  has  imputed 
to  it  the  whole  value  of  10 ;  but  if  the  water  needed  is  valued 
at  1  for  some  other  purpose,  as  for  sale  at  a  price,  then 
some  readjustment  of  other  values  must  take  place.  Either 
the  value  of  the  flour  falls  to  9,  or  that  of  the  bread  increases 
to  11,  or  an  adjustment  midway  between  these  values  is  made. 
In  this  way  occurs  the  adjustment  of  the  value  of  comple- 
mentary agents,  each  being  valued  in  relation  to  all  the  other 
uses  to  which  it  could  be  applied.  The  total  price  of  the 
products  evidently  must  closely  conform  to  the  total  price 
(actual,  or  estimated)  of  all  the  agents  entering  into  the 
products.  This  measurement  of  money-costs  and  their  adjust- 
ment to  prices  we  shall  have  to  study  more  fully  later  under 
"cost  of  production." 

2  Ignoring  here  for  the  moment,  labor,  yeast,  salt,  fuel,  etc. 


CHAPTER  14 
THE  RENTING  CONTRACT 

§  1.  Price  of  the  separable  use.  §  2.  Medieval  land  tenures  and  the 
usance  of  land.  §  3.  Land  destruction  and  repair.  §  4.  The  medieval 
rent-charge  as  a  sale  of  income.  §  5.  Definition  of  the  renting  contract. 
§  G.  Renting  of  agricultural  land.  §  7.  Renting  of  urban  real-estate. 
§  8.  Renting  of  dwellings.  §  9.  Renting  of  real-estate  for  business  uses. 
§  10.  The  renting  contract  in  other  cases.  §  11.  Buying  the  usance  with- 
out the  renting  contract.  §  12.  Unsuitabllity  of  the  renting  contract  in 
commerce.     §  13.  Definition  of  rent.     Note  on  Various  meanings  of  rent. 

§  1.  Price  of  the  separable  use.  "Wherever  there  is  a 
thing  of  value  there  is  a  chance  that  trade  will  occur  between 
men,  and  that  a  price  will  result.  In  our  discussion  of  price 
above  (Chapter  7)  we  fixed  our  attention  upon  those  cases 
where  concrete  objects  with  direct  uses  are  traded  as  wholes, 
such  as  loaves  of  bread,  apples,  and  horses.  The  owner  of 
such  a  commodity  must  usually  sell  the  whole  object  if  he  is 
to  sell  the  uses  that  it  contains.  The  price  is  built  upon  the 
valuations — in  the  minds  of  the  various  traders — of  the  to- 
tality of  uses  contained  in  the  goods.  Now  the  valuation  of 
the  uses  separately — the  conception  of  usance — makes  pos- 
sible the  problem  of  price  in  a  different  form,  that  of  the  buy- 
ing and  selling  of  the  separable  uses,  leaving  the  ownership  of 
the  durative  agent  unchanged.  The  simplest  way  to  buy  the 
uses  of  a  thing  would  seem  to  be  to  buy  the  use-bearer  out- 
right—boat, horse,  house,  land,  with  all  its  uses.  But  the  sale 
of  the  separable  use  may  under  some  conditions  be  simpler 
and  more  advantageous  to  both  parties  than  the  sale  of  the 
use-bearer  itself. 

§  2.  Medieval  land  tenures  and  the  usance  of  land. 
Doubtless  the  perception  of  this  advantage  led  to  multitudes  of 

143 


144  USANCE  AND  RENT  [Pt.  II 

loose  bargains  for  the  use  of  personal  belongings  in  earlier 
conditions  of  society ;  ^  but  the  first  great  development  of 
usance-trade  was  in  the  case  of  land.  In  ways  and  for  reasons 
which  need  not  be  described  here,  land  ownership  in  all  the 
early  civilizations  was  bound  up  with  certain  political  rights 
and  dignities.  The  land  was  not  a  personal  possession,  it 
could  not  be  sold  outright  (in  most  cases)  ;  it  must  be  passed 
on  to  the  heir  and  successor  of  the  landlord.  The  landlord 
got  his  income  from  those  to  whom  the  land-uses  were 
granted.  Even  as  late  as  feudal  times  in  medieval  Europe 
the  whole  social  organization  was  built  around  land  ten- 
ures. 

Land  and  the  things  pertaining  to  it,  such  as  ditches, 
houses,  mills,  cattle,  and  stock,  constituted  the  wealth  of  the 
rulers  and  landlords.  Land  was  granted  to  the  vassal,  or 
to  the  tenant  or  to  the  serf  in  return  for  produce,  and  for 
services,  some  military  and  some  agricultural  in  character. 
The  contract,  expressed  or  customary,  was  known  and  care- 
fully interpreted  in  all  its  items.  The  tenant  was  held  strictly 
to  his  duty  to  keep  the  land  in  nearly  undiminished  fertility. 
A  certain  mode  of  using  the  land  was  enforced;  certain 
limitations  were  placed  upon  the  use  of  pastures,  of  forests, 
and  of  fields.  Moreover,  the  tenant  had  an  interest  or  equity 
in  the  land  because  the  rent  he  had  to  pay  was  fixed  by  custom, 
not  by  competition,  and  always,  probably,  w^as  less  than  a 
competitive  price  would  have  been.  The  landlord,  therefore, 
could  count  in  good  part  on  the  undiminished  power  of  his 
land  and  stock  from  one  year  to  another. 

It  would  be  a  mistake  to  see  in  these  early  and  medieval 
relations  between  a  king  and  his  vassals,  and  between  land 
owners  and  the  serfs  on  their  estates,  more  than  a  vague  and 
embryonic  form  of  rent-contract.  Political  rather  than  eco- 
nomic relations  were  dominant ;  it  was  a  time  of  status  rather 

1  See  on  the  lack  of  definite  notions  of  price  among  fcllow-membcrs 
of  tribes  in  primitive  society,  selections  from  Herbert  Spencer  and  from 
Sir  Henry  Maine,  in  the  "Source  Book  in  Economics,"  pp,  3-14. 


I 


Cir.  14]  THE  RENTING  CONTRACT  145 

than  of  free  contract.^  Originally  in  taking  the  land  and 
pledging  loyalty  to  his  feudal  superior,  each  vassal,  high  or 
low,  assumed  pretty  definite  obligations,  some  of  a  military, 
others  of  a  political,  others  of  an  economic  nature.  But  there- 
after in  the  thought  of  that  time  there  was  but  vaguely  present 
the  notion  of  contract  in  the  modem  sense  as  regulating  the 
economic  relations  of  the  descendants,  peasant  and  landlord, 
or  landlord  and  his  feudal  superior.  "Each  man  took  his 
place  in  accordance  with  inherited  and  forced,  rather  than 
free,  contracts. ' '  ^  But  gradually  there  developed  a  more 
modern  form  of  agreement  between  the  owner  of  land  and 
the  tenant.  Kent-payment  by  the  tenant  and  wage-payment 
by  the  landlord  for  any  work  done  on  his  domain  by  the 
peasants  were  counterparts  in  this  development  in  which  con- 
tract was  gradually  displacing  custom,  status,  and  inheritance. 
§  3.  Land  destruction  and  repair.  It  has  been  seen  that 
all  economic  agents,  considered  as  wholes,  are  more  or  less 
consumptive,  and  more  or  less  durative.'*  In  practice  and  in 
theory  they  may  be  treated  as  either  the  one  or  the  other. 
They  may  be  treated  as  consumptive  by  letting  them  wear  out, 
while  spending  all  their  uses  within  a  certain  period;  thus  are 
used  food,  fuel,  lubricating  oil,  lights,  and  sometimes  tools 
and  machinery.  All  their  value  is  looked  upon  as  trans- 
ferred to,  or  realized  in,  the  product,  in  that  period.  On  the 
other  hand  some  goods  are  given,  by  means  of  repairs,  an 
artificial  appearance  of  durability,  so  that  the  whole  agent  is 
treated  as  having  the  durability  of  the  most  enduring  part  of 
it.  It  was  in  this  manner  that  agricultural  land  came  to  be 
looked  upon  as  indestructible.^    As  mere  land  surface,  or  loea- 

2  For  a  description  of  tiie  conditions  prevailing  in  England  just  before 
the  Norman  Conquest  in  lOCG  see  Cunningham,  "The  Growth  of  English 
Industry  and  Commerce,"  vol.  I,  p.  10  ff.  T\\e  conditions,  as  he  says,  are 
"difficult  to  describe  in  modern  terms,  as  these  connote  distinctions 
which  only  emerged  at  a  later  date." 

3  Cunningham,  idem,  p.  129. 

*  Review  in  general  ch.  11  on  Consumption  and  duration. 
6  See  especially  ch.  11,  sees.  7,  8. 


146  USANCE  AND  RENT  [Pt.  II 

tion  on  the  earth's  surface,  it  is,  except  for  rare  catastrophes, 
such  as  earthquakes,  volcanic  eruptions,  and  floods,  well-nigh 
everlasting  in  the  view  of  mortal  man.  But  it  is  something 
more  than  mere  location  that  makes  land  useful,  whether  used 
for  agricultural,  forestry,  quarrying,  or  mining  purposes. 
Used  for  these,  and  even  for  residence  and  commercial  pur- 
poses, it  is  quite  capable  of  being  used  up  and  destroyed  as 
a  use-bearer.  It  is  in  large  part  not  nature  but  man 's  art  in 
the  careful  use  of  land  that  enables  it  to  be  looked  upon  as 
an  indestructible  agent,  yielding  a  permanent  series  of  uses. 
A  form  of  contract  came  to  be  used  in  letting  the  land  for 
hire,  that  called  for  the  return  of  the  land  in  as  good  condition 
as  when  it  was  taken.  The  tenant  had  to  replace  the  ele- 
ments of  fertility  which  he  used  up.  It  is  clear  that  the  main 
thing  he  buys  from  the  landlord  is  what  we  have  called  the 
usance  of  land;  but  as  he  usually  takes  something  more 
(through  failure  to  repair  and  because  of  inevitable  deprecia- 
tion) he  pays  for  this  an  additional  price  included  in  the  gross 
rent. 

§  4.  The  medieval  rent-charge  as  a  sale  of  income.  It 
thus  came  about  that  land,  tho  not  as  an  economic  good  inde- 
structible, was  nevertheless  in  many  cases  so  managed  as  to 
yield  a  continuing  income.  In  medieval  times  this  income  or 
rent  was  realized  in  products  and  services,  not  in  money. 
The  fruits  of  the  soil  were  consumed  on  the  spot  instead  of 
being  sold  as  now.  Land  was  thought  of  as  a  place  on  which 
the  tenant  could  live  and  from  which  the  landlord  could  draw 
an  income.  The  medieval  estates  were  so  tied  up  by  legal 
conditions  that  they  could  not  be  sold  outright,  so  means 
were  found  of  doing  practically  the  same  thing.  The  owner, 
in  some  cases,  mortgaged  the  annual  rental  by  selling  a  rent- 
charge  upon  it.  A  rent-charge  was  an  annual  sum  payable 
(in  perpetuity  or  until  redeemed)  out  of  the  yield  of  an  estate. 
Thus,  in  the  Middle  Ages,  not  the  land  itself,  the  mill,  the  mar- 
ket rights,  the  forest,  etc.,  were  subject  to  trade,  sale,  and 
contract,  but  merely  the  usufruct,  as  a  whole  or  in  part,  for  a 


Ch.  14]  THE  RENTING  CONTRACT  147 

definite  period.  The  sale  of  rent-charges  has  now  only  a  his- 
torical interest,  as  loans  now  are  made  in  other  ways,  the  land 
being  pledged  as  security  for  repayment.  After  this  brief 
survey  of  the  old  land  tenures  we  turn  now  to  the  modern 
method  of  selling  the  use  of  wealth  of  various  kinds  under  the 
form  of  the  renting-contract. 

§  5.  Definition  of  the  renting-contra,ct.  The  renting-con- 
tract is  the  agreement  of  a  borrower  to  pay  a  specified  price 
for  the  use  of  a  thing  and,  at  the  end  of  a  specified  period,  to 
restore  it  in  good  condition  or  pay  for  its  repair.  In  prac- 
tical business  it  is  necessary  to  have  definite  agreements  to 
prevent  disputes,  and  whenever  a  thing  is  rented  there  is  a 
contract,  either  implied  by  custom  or  formally  made,  orally 
or  in  writing.  The  terms  are  all  specified;  the  duration, 
whether  for  a  day  or  perpetual,  or  at  the  pleasure  of  either 
party ;  the  rent,  whether  cash,  share  of  the  produce,  definite 
or  contingent  on  some  events;  taxes,  insurance,  and  repairs, 
what  and  how  much  to  be  done  by  either  borrower  or  lender. 
In  the  case  of  things  other  than  land,  many  other  details  must 
be  specified.  Some  of  these  details  may  be  merely  implied  in 
a  higher  gross  rent,  which  covers  ordinary  wear  and  tear,  or- 
dinary risk  of  breakage,  fire,  etc.,  and  ordinary  risks  of  every 
kind  (e.g.,  rent  of  piano,  of  theatrical  wardrobe),  the  bor- 
rower being  liable,  however,  for  unusual  carelessness  in 
use. 

The  form  of  the  renting-contract  is  observed  by  men  in 
estimating  the  uses  of  their  own  wealth  where  no  contract 
exists.  If  they  count  the  gross  product  of  an  agent  as  a  net- 
usance,  it  is  bad  bookkeeping.  In  many  cases  it  is  necessary, 
therefore,  for  owners  to  observe  the  form  of  the  renting  con- 
tract in  order  to  determine  the  net  yield  of  durable  goods. 

§  6.  Renting  of  agricultural  land.  The  employment  of 
the  renting-contract  is  determined  by  its  advantages  and  dis- 
advantages under  particular  conditions  as  compared  with  other 
business  methods.  Even  in  the  renting  of  land  for  agricul- 
ture, the  difficulties  of  the  contract  are  great.     It  calls  for  a 


148  USANCE  AND  RENT  [Pt.  II 

personal  oversight  that  is  burdensome  to  the  landlord  and  an- 
noying to  the  tenant,  to  make  sure  that  repairs  are  made,  that 
straw  and  hay  are  fed  on  the  place  so  that  the  soil  may  not  be 
impoverished,  to  ensure  the  purchase  of  other  fertilizer  accord- 
ing to  the  agreement,  and  hundreds  of  other  details.  The 
practice  of  making  long  leases  obviates  some  difficulties  and 
aggravates  others.  If  improvements  made  by  tenants  revert 
to  the  landlord  at  the  expiration  of  the  lease,  as  was  formerly 
the  case  in  Ireland,  there  is  little  motive  for  enterprise;  and 
if  tenants'  improvements  must  be  bought  by  the  landlord, 
there  are  many  occasions  for  dispute.  Under  fairly  unchang- 
ing conditions  as  to  prices  and  markets,  long-time  leases  may 
be  equitable;  but  during  the  wavelike  change  of  food  prices 
in  the  nineteenth  century  long  leases  increased  the  hardships 
to  tenants  in  all  countries  in  Europe  and  America.  Despite 
these  drawbacks,  agricultural  lands  with  their  improvements 
continue  to  be  largely  rented,  both  in  Europe  and  America. 
Of  the  nearly  6,400,000  farms  in  the  United  States  in  1910, 
owners  occupied  62  per  cent,  hired  managers  ran  1  per  cent, 
and  tenants  operated  37  per  cent  (24  per  cent  renting  on 
shares  of  the  produce,  and  13  per  cent  for  cash).  There 
were  2.3  million  farm  homes  rented  in  1910.  But  in  America 
and  Australia,  far  more  than  in  the  older  countries,  land 
changes  hands  by  sale,  and  many  persons  prefer  to  go  into 
debt  for  land,  giving  a  note,  secured  by  mortgage,  and  paying 
interest  on  the  loan,  rather  than  to  pay  rent. 

§7.  Renting  of  urban  real-estate.  The  class  of  wealth 
that  is  now  proving  to  be,  on  the  whole,  best  usable  under  the 
renting-contract  is  land  and  buildings  in  urban  locations.  On 
the  whole  the  difficulty  of  ensuring  the  durative  character  of 
city  real-estate  (land  and  building  taken  together)  is  less 
than  in  the  case  of  agricultural  real-estate.  The  land  being 
used  solely  as  solid  surface,  standing  room,  and  not  at  all  as 
a  source  from  which  the  chemical  elements  of  fertility  are 
extracted,  is  (except  in  the  most  rare  cases  of  floods  and  earth- 
quakes) subject  to  no  such  physical  deterioration.     The  build- 


Ch.  14]  THE  RENTING  CONTRACT  149 

ings,  however,  make  up  a  large  part  of  the  value  of  urban 
real-estate,  and  in  many  eases  they  are  subject  to  depreciation 
and  to  dangers.  The  greatest  of  these  dangers,  that  from  hre, 
can  be  guarded  against  by  insurance  and  thus  converted  into 
a  regular  cost  of  maintenance.  Damages  by  rough  usage 
may  be  offset  by  higher  charges  to  the  tenants.  Rentals 
charged  to  careless  classes  of  tenants,  or  to  careless  individuals, 
often  are  fixed  higher  than  rentals  to  careful  tenants.  By 
these  means  and  by  careful  oversight,  tenements  and  resi- 
dences, which  have  a  large  measure  of  consumptiveness,  can  be 
treated  as  durative  agents  more  easily  than  can  agricultural 
lauds. 

§  8.  Renting  of  dwellings.  There  are  in  many  eases 
strong  reasons  why  it  is  to  the  interest  both  of  the  owner  and 
of  the  tenant  to  bargain  for  the  transfer  of  the  usance  rather 
than  of  the  fee-simple  (complete  right  of  ownership)  of  city 
residences.  "With  many  changes  in  the  modern  citizen's  busi- 
ness and  social  conditions,  thousands  of  families  are  often 
absent  for  a  time  from  their  regular  place  of  residence,  and 
while  letting  their  own  houses  to  tenants,  they  become  tenants 
in  the  houses  of  others.  Often  the  tenant  may  be  a  rich  man 
who  could  easily  buy  the  house,  if  hiring  it  were  not  more 
advantageous.  Every  year  many  thousands  of  winter  homes 
of  owners  are  let  in  summer  while  the  owners  are  away,  and 
many  thousands  of  summer  homes  usually  occupied  by  the 
o\\'ners  are  let  where  the  owner  is  prevented  by  ill-health,  or 
by  business  plans,  or  by  travel  from  occupying  the  home 
himself,  or  is  led  by  the  desire  for  a  change  to  go  to  some 
other  place  for  the  summer.  The  uncertainty  of  employment 
for  professional,  clerical,  or  manual  workers,  makes  the  buy- 
ing of  a  house  of  doubtful  wisdom  in  many  eases,  even  where 
it  would  be  financially  possible.  There  are  thus  millions  of 
families  that  are  not  would-be  buyers  of  houses,  but  are 
nevertheless  buyers  of  the  uses  of  houses.  There  were  8.4  mil- 
lion homes  other  than  farm  homes  rented  in  1910  in  the  United 
States  (that  is  homes  in  cities,  villages,  and  the  country  dis- 


150 


USANCE  AND  RENT 


[Pt.  II 


tricts,  not  occupied  by  one  operating  a  farm).  This  demand 
is  far  beyond  what  can  be  met  by  the  chance  vacancies  of 
owners'  regular  dwellings,  and  it  offers  a  field  for  a  very  safe 


£0 


Form    Homes 
Norm  ISouTh  IWesiIuS 


Other    Home* 
North    |5outn  NbstIuS 


All  Homes 
All    Monies  5outh 

Mrrh  ISouih  |v*stIU5  Whitel Colored 


"I 
11     ii 


num^^  2?ipin.- 


Fia.    23. 


Home  Ownership  in 


lJ  <  u  o  <  u  o  ^  „ 

THE    U.     S..     1910, 


t^ 


i 


A  number  of  significant  facts  are  here  shown  graphically.  In  every 
ci-naiis  division  a  larger  percentage  of  farm  homes  is  owned  than  of 
"other  homes."  A  larger  percentage  of  farm  ownership  is  found  in 
every  nortiiern  and  western  division  than  in  any  southern  division, 
New  England  being  highest  and  the  Mountain  and  Pacific  divisions  fol- 
lowing in  order. 

The  last  two  columns  show  the  small  percentage  of  ownership  by 
colored  occupants  in  the  South,  this  explaining  largely  the  small  per- 
centage of  ownership  in  that  section  both  of  farm  and  other  homes. 

In  every  division  "other  homes"  are  owned  in  smaller  proportion 
than  are  farm  homes,  the  contrast  being  greatest  whore  the  urban  popu- 
lation is  largest,  viz.,  in  New  FJngland  and  the  Middle  Atlantic  states. 
The  North  Central,  the  Mountain,  and  the  Pacific  divisions  all  rank 
high  in  ONvnership  of  other  homes  as  well  as  of  farms,  and  the  southern 
divisions  rank  low  in  both. 


kind  of  investment  under  their  personal  oversight  for  persons 
of  small  or  moderate  means. 


Ch.  14]  THE  RENTING  CONTRACT  161 

§  9.  Renting  of  real-estate  for  business  use.  The  rent- 
ing-contract  has  marked  advantages  in  the  hiring  of  shops, 
stores,  and  office-buildings  in  cities.  There  the  land  has  a 
well-nigh  absolute  durativeness,  and  the  buildings  may  be 
built  of  very  durable  materials.  Merchants  often  find  it  of 
advantage  to  move  into  larger  quarters  as  business  grows,  or 
into  a  different  neighborhopd  as  the  center  of  trade  changes. 
Moreover,  as  active  business  men  they  often  can  keep  their 
funds  invested  to  better  advantage  in  their  business  than  by 
putting  them  into  the  purchase  outright  of  a  store-building, 
as  the  rate  of  yield  on  real-estate  investments  is  usually  less 
than  that  in  commerce  and  manufacture."  Many  small  mer- 
cantile businesses  require  only  a  small  space,  less  than  could 
be  bought  or  built  on  to  advantage  in  a  large  city,  and 
many  agents  and  professional  men  need  merely  office  space. 
This  large  and  regular  demand  for  shops  and  offices  calls 
forth  the  enterprise  of  investors  to  construct  and  maintain 
suitable  buildings  to  let  for  these  purposes.  Hundreds  of 
millions  of  dollars  of  the  funds  of  life  insurance  companies, 
collected  from  policy-holders,  are  invested  in  this  way,  as  well 
as  funds  of  educational  institutions  and  of  business  corpora- 
tions. Thus  it  happens  that  many  corporations  with  millions 
of  capital  are  in  the  larger  cities  tenants  in  offices  owned  by 
other  corporations  which  own  office  buildings,  such  as  the 
Times  Building,  the  ^Metropolitan  Life  Insurance  Building, 
the  Singer  Building,  the  Woolworth  Building,  the  Equitable 
Building,  in  New  York  City.  The  very  size  of  such  office 
buildings  and  their  conspicuousness  in  public  attention  give 
to  the  offices  in  them  an  advantage  in  convenience  of  access 
and  for  advertising  purposes  greater  than  is  possible  under 
other  circumstances. 

The  rapid  changes  that  are  going  on  in  America  bring  about 
most  varied  conditions  of  ownership  and  tenancy  in  regard  to 
urban  industrial  real-estate.  IManufacturing  on  a  small  scale 
is  often  started  in  rented  buildings  even  in  small  towns,  and 

«  See  ch.  26  on  Enterprise. 


152  USANCE  AND  RENT  [Pt.  II 

in  the  large  cities  this  is  more  common.  But  the  larger  manu- 
facturing firms  and  companies  usually  own  the  building  and 
land  in  which  their  manufacturing  is  done.  The  special 
character  of  the  machinery  used  and  of  the  buildings  required 
make  this  the  better  plan.  Even  then,  however,  the  need  of 
expansion  often  leads  to  the  hiring  of  additional  land,  build- 
ings, and  offices.  The  extent  to  which  the  renting  of  real- 
estate  for  business  purposes  is  practised  now  is  thus  in  the 
aggregate  enormous. 

§  10.  The  renting-contract  in  other  cases.  There  has  al- 
ways been  a  strong  motive  for  the  renting  of  smaller  objects 
of  movable  wealth,  rather  than  their  purchase  outright,  wher- 
ever the  user  has  a  need  of  an  agent  in  an  unusual  place,  or 
a  temporary  need  of  an  exceptional  nature.  The  traveler 
wishing  to  cross  the  stream  needs  the  boat  but  once,  and  many 
other  travelers  will  pass  the  same  way  having  the  same  single- 
time  need.  Usually  the  payment  in  this  case  is  in  the  form 
of  a  fee  for  both  the  boat  and  the  ferryman's  services.  The 
farmer  would  like  to  have  an  extra  horse  for  a  few  days  each 
year  and  can  afford  to  pay  well  for  its  use,  but  could  better 
go  without  the  horse  those  few  days  than  have  the  expense  of 
keeping  it  throughout  the  year.  He  may  gain  greatly,  how- 
ever, if  he  can  hire  a  horse  at  such  times. 

A  hack  or  a  taxicab  is  hired  by  the  hour,  a  carriage  from  the 
livery  stable  by  the  day,  a  bicycle,  a  sewing  machine,  a  type- 
writer, by  the  day,  week,  or  month.  Boats,  guns,  tents, 
jewelry,  even  diamond  engagement  rings,  yield  their  joys 
under  the  renting  contract.  People  frequently  hesitate  be- 
tween the  renting  and  the  purchase  of  a  piano,  and  in  some 
cases  renting  is  the  more  convenient  and  desirable  way  of 
securing  its  use.  The  purchase  of  a  dress-coat  or  of  a  mas- 
querade-suit to  be  worn  but  once,  involves  for  some  persons 
a  needlessly  large  expense,  when  for  a  moderate  sum  the 
temporary  use  may  be  had,  and  the  article  may  then  be  re- 
turned, little  the  worse  for  wear,  to  the  accommodating 
clothier. 


Ch.  14]  THE  RENTING  CONTRACT  153 

§  11.  Buying  the  usance  without  a  renting-contract. 
When  the  owner  or  his  employee  has  charge  of  the  agent  and 
directs  it,  there  is  usually  not  a  renting-contract,  altho  the 
purchaser  is  buying  the  usance.  "When  the  use  of  the  machine 
is  a  minor  element,  the  transaction  takes  the  form  of  hiring 
the  man's  services,  while  he  furnishes  the  needed  machines. 
Thus  the  cabman,  the  truckman,  the  ferryman,  the  bootblack, 
the  carpenter,  are  hired  and  paid  for  their  labors  along  with 
the  use  of  the  wagon,  horse,  boat,  brushes,  and  tools.  These 
cases  are  midway  between  the  hiring  of  a  material  use-bearer 
and  the  hiring  of  a  laborer,  having  something  of  the  nature 
of  each.  A  case  of  the  same  kind  on  a  large  scale  is  seen 
in  transportation  by  railroad  or  by  steamship,  where  the 
passenger  is  getting  by  one  payment  a  great  complex  of  uses, 
of  fuel,  engines,  machines,  car  or  ship,  services  of  engineer, 
seaman,  conductor,  or  captain.  It  is  a  step  further  to  the 
case  where  the  customer  buys  the  product  of  a  factory.  The 
sale  of  the  yard  of  cloth  is  the  sale  of  the  raw  materials,  the 
uses  of  building,  engines,  looms,  and  the  labor  of  various  em- 
ployees, all  combined  in  one  product.  In  some  cases  the 
usance  (as  of  craftsmen's  tools)  is  sold  under  a  labor-  or 
wage-contract;  in  other  cases  (as  of  boats  and  trains)  it  is 
sold  under  a  transportation  contract,  the  price  becoming 
chargeable  as  the  usance  is  given;  in  other  cases  (as  in  manu- 
facturing and  mercantile  business)  the  price  of  the  usance  is 
included  in  the  contract  of  sale  of  products  which  the  uses  of 
agents  have  at  an  earlier  time  helped  to  produce.  In  none 
of  these  cases  is  there  a  renting-contract,  for  possession  of  the 
agent  is  not  delivered  to  the  buyers  of  the  use,  and  the  owner 
continues  to  be  responsible  for  the  repair  and  operation  of  the 
agent.  It  is  merely  a  matter  of  convenience,  reflected  and 
fixed  in  custom,  whether  sale  of  usance  shall  be  under  the 
renting-contract  or  under  some  other  form.  With  more  or 
less  of  difficulty  and  of  advantage  its  use  might  be  extended  to 
the  borrowing  and  lending  of  many  classes  of  goods  where  it 
is  not  now  used. 


154  USANCE  AND  RENT  [Pt.II 

§  12.    Unsuitability  of  the  renting-contract  in  commerce. 

The  renting-contract  has  always  proved  to  be  unsuited  to 
most  transactions  of  commerce  and  manufactures.  As  these 
classes  of  industry  were  developing  rapidly  in  cities  near  the 
end  of  the  I^Iiddle  Ages  and  throughout  the  sixteenth,  seven- 
teenth, and  eighteenth  centuries,  borrowing  and  lending  in 
the  form  of  or  in  terms  of  money  was  more  and  more  employed, 
and  in  this  respect  there  was  a  striking  contrast  between  city 
industries  and  agriculture,  where  the  renting-contract  was 
almost  universal. 

The  materials  and  appliances  needed  for  manufacture  and 
commerce  are  so  manifold,  and  are  so  varying  in  quality,  that 
the  renting-contract  is  very  cumbersome  and  difficult  to  en- 
force. A  merchant  embarking  on  a  trading  journey  would 
find  great  annoyance  in  renting  a  ship  and  a  stock  of  goods. 
He  must  agree  to  repay  the  loan  in  goods  of  the  same  kind  and 
quality  as  those  received,  a  contract  most  difficult  to  inter- 
pret and  execute,  and  giving  occasion  to  costly  tests  and  count- 
less disagreements.  It  was  much  easier  for  the  merchant  if 
he  had  not  means  enough  for  his  enterprises  to  get  others  to 
go  in  on  shares  (a  very  common  method)  or  to  obtain  a  loan 
under  the  interest  contract,  i.e.,  either  a  money  loan,  with 
which  to  buy  the  goods,  or  an  agreed  price  in  money  for  all 
the  goods  borrowed.  "With  the  growth  of  industry  and  com- 
merce, wealth  increased  in  towns,  more  and  more  taking  the 
form  of  goods  which  could  not  conveniently  be  rented,  such  as 
ships,  wagons,  tools,  and  stocks  of  merchandise.'^ 

1  This  simple  difference  in  practice  created  and  long  fostered  an  illusion 
in  the  minds  of  economists,  that  land-rent  was  an  income  of  a  peculiar 
nature,  governed  by  quite  different  laws  from  those  that  govern  the 
income  yielded  by  the  machines,  tools,  and  other  agents  in  manufac- 
turing and  commerce.  Various  curious  explanations  of  this  contrast  were 
given,  all  resting  on  the  notion  of  some  inlierent  differences  in  the  kinds 
of  goods,  rather  than  in  the  form  of  contract.  Traces  of  this  notion 
still  appear  in  the  classification  of  wealth  into  land  and  artificial  agents 
(often  called  capital)  and  in  the  assumption  that  rent  and  interest  must 
in  the  very  nature  of  things  proceed  from  different  classes  of  goods. 


Ch.  14]  THE  RENTING  CONTRACT  155 

§  13.  Definition  of  rent.  Let  us  now  consider  the  term 
applied  to  the  payment  made  under  the  renting-contract. 
The  word  rent  comes  from  the  Low  Latin  renta  from  renda, 
or  rendita,  in  turn  from  redditus,  that  which  is  given,  yielded, 
given  back  or  returned.  The  French  rendre  (English 
render),  to  give  or  return  that  which  belongs  to  one,  was 
used  very  early.  Chaucer  used  "rente"  as  income:  "Cat- 
tle had  he  enough  and  rente,"  "cattle"  probably  meaning 
chattels  (goods,  wealth)  and  "rente"  meaning  income."  The 
larger  incomes  of  that  time  were  derived  as  payments  from 
vassals  or  tenants  of  estates.  Rental  is  a  collective  term  for 
a  number  of  rents ;  the  total  yield  of  an  estate  was  called  its 
rental,  and  a  list  of  the  various  sources  of  income,  including 
all  payments  due  from  tenants  in  money,  produce  or  services, 
constituted  its  rent-roll. 

The  word  rent  has  continued  to  be  used  popularly  as  the 
amount  paid  by  one  person  to  another  for  the  use  of  material 
things  which  must  be  returned  to  the  owner  after  the  time  of 
use  agreed  upon.  We  speak  of  the  rent  of  a  house,  boat,  etc., 
using  the  word  as  a  synonym  for  hire.  In  the  European  lan- 
guages the  word  is  used  generally  in  that  sense,  tho  with 
various  shades  of  meaning.  In  French  la  rente  means  the 
income  from  any  kind  of  property;  but  corporate  securities 
and  national  bonds  particularly  are  called  les  rentes  (prob- 
ably because  they  are  a  form  of  investment  yielding  a  per- 
manent income),  and  one  who  has  a  fixed  income  from  rents 
is  called  a  rentier.  In  German  the  term  Rente  is  used  more 
broadly  than  in  English,  as  an  income  of  any  sort,  Grund- 
rente  meaning  the  rent  of  land,  and  Capitalrente  (like  Capi- 
talzins)  the  income  usually  in  English  called  (according  to 
conditions)  either  dividends  or  interest. 

"With  this  usage  and  the  problem  in  view,  we  may  define 
rent  as  the  price  paid  for  the  temporary  possession  and  use 
of  a  more  or  less  durative  agent  which  is  to  be  returned  to 
the  owner  at  the  end  of  the  specified  period.  Thus  broadly 
understood,  rent  as  a  contractual  payment  includes  not  only 


1S6  USANCE  AND  RENT  [Pt.  II 

the  price  of  the  true  usance,  but  usually  also  something  more 
to  cover  repairs,  wear  and  tear,  services  of  the  owner  in  pre- 
paring and  taking  care  of  the  use-bearer,  collecting  the  rent, 
etc.  It  is  useful  to  distinguish  between  the  whole  payment, 
the  gross  rent  and  the  true,  or  net,  rent  which  is  that  part  of 
the  payment  that  is  left,  after  making  due  allowance  for  all 
the  other  items  of  cost.  Net  rent  is  the  estimated  price  of  the 
net  usance. 

In  the  next  chapter  we  have  to  examine  how  the  general 
principles  of  price  are  exemplified  in  the  problem  of  rent. 

Note 
Various  meanings  of  rent.  Various  other  meanings  have  been  given 
to  rent  as  used  in  economics  which  may  be  called  to  the  student's  at- 
tention that  he  may  be  on  his  guard  against  misunderstanding.  The 
English  economists  from  Adam  Smith  on  restricted  the  meaning  to  the 
most  striking  of  the  cases  of  rent,  as  seen  in  their  day,  and  defined  it 
in  the  words  of  Eicardo  as:  "The  price  paid  to  the  landlord  for  the 
use  of  the  original  and  indestructible  qualities  of  the  soil."  Most  of 
the  landlords  of  England  did  not  themselves  cultivate  the  soil,  and  their 
incomes  were  paid  to  them  by  tenant  farmers.  Where  lands  were 
cultivated  by  the  owners,  there  was  a  value  in  the  use  of  the  land 
considered  logically  apart  from  the  value  in  the  cultivator's  own  labor 
and  from  other  costs;  in  other  words,  there  was  a  usance-value  in  the 
land,  and  economists,  having  no  name  for  this,  widened  the  application 
of  the  word  rent  to  include  this  as  well  as  the  price  paid  to  a  land- 
lord. But  they  did  not  widen  it  to  include  the  usufructuary  value 
of  other  agents,  and  thus  they  contrasted  rent  with  interest  from 
money  loaned,  with  the  income  (called  by  them  profits)  from  agents 
employed  in  commerce  and  manufacture,  and  with  wages  of  labor.  The 
authority  of  this  definition  of  rent  has  rapidly  waned  since  criticism 
has  shown  its  accidental  origin  and  its  illogical  limitations.  When 
it  was  recognized  that  there  was  a  difference  between  the  usance  of 
an  agent  to  the  owner  and  the  price  paid  to  him  by  another  for  its 
uses,  the  attempt  was  made  to  call  the  former  economic  rent  and  the 
latter  contract  rent.  But  this  has  proved  to  be  confusing  and  has 
never  gained  a  place  in  popular  usage.  In  business  practice  the  term 
rent  is  rarely  if  ever  applied  to  the  usance,  but  only  to  a  contractual 
payment  for  the  use.  In  the  attempt  to  remedy  the  lack  of  logic  in 
the  definition  some  economists  have  widened  the  term  to  indicate  any 
advantage  secured  in  exchange  (the  margin  of  advantage),  using  such 


Ch.  14]  THE  RENTING  CONTRACT  157 

expressions  as  consumers'  rent,  producers'  rent,  buyers'  rent,  sellers' 
rent,  and  thus  have  lost  all  touch  both  with  the  original  economic 
definition  and  with  popular  usage.  Our  analysis  puts  an  end  to  this 
variation  and  inconsistency,  by  its  identification  of  the  separable  use 
as  the  object  of  valuation.  Thus  usance  and  rent  are  seen  to  be  the 
value  and  the  price  aspects  of  the  same  problem. 


CHAPTER  15 
PRINCIPLES  OF  RENT 

S  1.  Divergence  of  actual  rents  from  competitive  rents.  §  2.  Cross 
and  net  rent  to  the  owner.  §  3.  Different  grades  of  fertility  as  affect- 
ing rent.  §  4.  Different  costs  of  cultivation  as  affecting  rent.  §  5.  Dif- 
ferences in  location  as  affecting  rent.  §  6.  The  general  doctrine  of 
rent.  §  7.  Dependence  of  rent  on  proportionality.  §  8.  Kent  and  in- 
tensive utilization.  §  9.  Divergent  subjective  valuations  of  different 
bidders.  §  10.  Example  of  competing  bids.  §  11.  Complexity  of  the  sit- 
uation lying  back  of  each  bid.  §  12.  Personal  efficiency  as  affecting  the 
valuation  of  agents.     §  13.  Variability  of  rents. 

§  1,    Divergence  of  actual  rents  from  competitive  rents. 

Every  rent  paid  by  one  person  to  another  grows  out  of  some 
agreement,  explicit  or  implied,  between  two  parties,  and  in 
a  very  general  sense  may  be  called  a  contractual  payment. 
But  the  agreements  in  force  at  any  moment  differ  in  regard  to 
the  time  that  has  elapsed  since  they  were  made,  in  regard  to 
the  conditions  that  existed  when  they  were  made,  and  in 
regard  to  the  changes  that  have  taken  place  meantime  affecting 
the  value  of  the  uses  of  the  wealth.  It  must  often  happen, 
therefore,  that  the  rent  which  the  borrower  is  obligated  to 
pay  is  either  more  or  less  than  the  usance-value  as  estimated 
at  the  present  moment.  It  is  necessary  to  distinguish,  there- 
fore, the  terms  customary  rents,  lease  rents,  and  competitive 
rents.  A  competitive  rent  is  the  rent  that  is  (or  would  be) 
arrived  at  under  the  free  operation  of  the  actual  competitive 
market  conditions.^  A  large  part  of  the  rents  actually  paid, 
especially  for  lands  and  houses,  are  not  at  this  rate,  but  at  a 
rate  determined  at  an  earlier  date  and  under  more  or  less 
restricted  competition.     Some  may  be  customary  rents  which 

1  See  ch.  8,  Competition  and  monopoly. 

158 


Ch.  15]  PRINCIPLES  OF  RENT  159 

were  fixed  in  former  generations  and  are  not  subject  to  revi- 
sion. Custom,  in  the  case  of  a  large  part  of  the  land  holdings 
of  the  older  countries  of  Europe,  Asia,  and  Africa,  prevents 
the  landlord  from  charging  all  that  the  usance  of  the  land  is 
now  worth.  Presumably,  when  the  feudal  agreements  were 
made  in  Europe  a  thousand  years  or  more  ago,  there  was  a 
rough  equivalence  in  the  benefits  accruing  to  the  landlord  and 
the  tenant,  respectively.  In  eases  where  the  customary  tenant 
and  his  descendants  have  the  right  to  continue  at  a  rate  below 
a  competitive  rent,  the  tenant  is  to  some  degree  a  sharer  in 
the  ownership;  the  value  of  the  usufruct  is  divided  between 
the  two  parties.  In  communities  where  customary  rents  are 
common,  a  rent  of  the  full  annual  value  of  the  tenement,  or 
near  it,  is  called  a  rack  rent.  It  often  has  resulted  from  some 
encroachment  by  the  landlord  upon  the  tenant's  rights,  and 
therefore  the  term  has  an  evil  implication. 

In  other  cases,  notably  in  England,  leases  of  agricultural 
land  are  made  for  periods  as  long  as  30  years,  and  the  tenants 
have  often  been  the  losers  because,  before  the  end  of  the  time, 
the  prices  of  agricultural  products  had  fallen.  Even  in 
America  city  land  is  sometimes  leased  at  a  quit-rent  for  99 
years,  and  railroads  are  leased  to  other  railroads  for  999 
years.  Here  the  contractual  rent  actually  paid  each  year 
varies  greatly  from  what  the  competitive  rate  would  be  if 
fixed  annually.  The  annual  rent  agreed  upon  at  the  signing 
of  a  long-time  lease  is  not  likely  to  be  the  competitive  rent  of 
the  then  current  year,  but  rather  an  equalization  of  the  vary- 
ing rents  of  the  whole  period,  as  forecast  by  the  bidders  for 
the  agents.  Divergent  actual  rents  for  the  same  grade  of 
agents  may  therefore  exist  side  by  side,  according  to  varieties 
in  customs  and  contracts. 

§  2.  Gross  and  net  rent  to  the  owner.  The  renting-eon- 
tract  is  rarely  found  in  its  pure  form.  Rarely  is  the  bor- 
rower, or  tenant,  required  to  keep  the  agent  in  perfect  con- 
dition ;  therefore  when  the  rent  is  fixed,  a  certain  amount  of 
repairs  and  some  provision  for  ultimate  replacement  is  allowed 


160  USANCE  AND  RENT  [Pt.  II 

for  and  included.  The  house-owner  usually  has  to  look  after 
the  fire  insurance,  nearly  always  has  to  pay  the  taxes,  usually 
has  to  reshingle,  repaint,  and  repaper  from  time  to  time,  has 
often  to  employ  a  janitor,  and  where  there  is  an  elevator,  to 
pay  for  its  operation.  Evidently  the  rent  must  cover  all 
these  items  before  we  can  speak  of  the  remainder  as  a  net 
income  to  the  landlord.  A  large  part  of  the  rent  of  boats 
received  by  some  boatmen  is  used  to  pay  their  attendants 
and  the  rent  of  the  docks  they  use;  and  a  considerable 
part  of  the  rent  received  for  the  docks  is  expended  by  the 
owners  to  replace  rotting  piles  and  boards  and  otherwise  to 
keep  up  the  repairs.  The  owner  nearly  always  has  in  mind 
certain  costs  of  the  business  which  must  be  deducted  from 
the  sum  spoken  of  as  rent.  This  difference  between  the  bor- 
rower's view  and  the  lender's  view  must  not  be  overlooked 
iu  any  specific  case.  The  borrower's  idea  of  rent  is  what  is 
generally  understood  by  the  term  rent  in  a  contract,  namely, 
the  amount  he  pays;  the  lender's  idea  of  rent  is  often  the 
corrected  amount,  the  net-rent  which  is  attributable  to  the 
sale  of  the  usance  of  the  particular  agent.  This  sum,  since 
it  is  the  price  of  the  usance,  is  an  absolutely  net  income.  As 
far  as  can  be  foreseen  it  is  an  income  "in  perpetuity,"  that 
is,  accruing  each  year  and  likely  to  accrue  each  year  into  the 
indefinite  future.  But  whether  a  given  contract  rent  is  gross 
or  net  is  immaterial  for  our  present  purpose.  In  either  case 
its  amount  is  determined  in  the  same  way  that  the  market 
price  of  present  direct  goods  is  determined.  (See  Chapter 
7.)  It  is  the  resultant  of  individual  valuations  which,  in 
a  true  market,  mutually  influence  each  other,  and  generate  a 
market  price.  It  is  the  price  which  brings  as  near  as  possible 
to  equilibrium  the  amount  offered  and  the  amount  demanded. 
§  3.  Different  grades  of  fertility  as  affecting  rent.^  The 
theory  of  rent,  as  usually  presented,  deals  with  very  simple 

2  Everything  here  said  of  fields  as  agents  may  be  said  mutatis  mutandis 
of  any  other  class  of  agents  which  are  of  different  grades  or  which  are 
used  with  different  degrees  of  intensiveness. 


Ch.  15] 


PRINCIPLES  OF  RENT 


161 


Fig.    24.     Gbadbs    or 
Fertility. 


conditions,  which  may  be  illustrated  as  follows.  Assume  that 
there  are  several  fields,  all  equally  acces- 
sible to  the  market,  and  all  requiring  the 
same  amount  of  labor  and  of  materials  for 
their  cultivation.  "With  a  small  popula- 
tion only  the  most  fertile  tract  A  would 
be  tilled  and  there  would  be  no  rent.  As 
soon  as  it  became  necessary  to  cultivate  B, 
a  rent  of  two  bushels  an  acre  would  begin 
on  A.  Just  as  it  became  necessary  to  seek  a  part  of  the  food 
supply  on  D,  the  rent  on  the  C  tract  would  be  two  bushels,  on 
B  would  be  four  bushels,  and  on  A  would  be  six  bushels  an 
acre. 

§4.  Different  costs  of  cultivation  as 
affecting  rent.  Or  changing  our  hy- 
pothesis we  may  suppose,  in  accordance 
with  some  cases  that  actually  occur,  that 
all  the  tracts  yield  practically  the  same 
gross  product  per  acre,  say  24  bushels, 
but  require  different  outlays  per  acre  be-  fig.     25.      dutfeeknt 

„  ,  .  ,  IP  1    '  Costs     or     Cultiva- 

cause  of  hills,  rocks,  needs  of  supplying'    tion. 

fertilizer,  or  any  other  reason.    Under  these  conditions  the 

rents  would  be  the  same  as  in  the  other  case. 

A  yields  24  bushels  less  18  for  costs,  rental,  6  bushels. 

B  yields  24  bushels  less  20  for  costs,  rental,  4  bushels. 

C  yields  24  bushels  less  22  for  costs,  rental,  2  bushels. 

D  yields  24  bushels  less  24  for  costs,  rental,  0  bushels. 

§  5.  Differences  in  location  as  affect- 
ing rent.  Still  another  case  is  presented 
when  fields  are  of  equal  fertility  but  are 
at  various  distances  from  the  market 
where  the  product  is  u?ed  and  the  price 
is  fixed.  Assume  that  the  costs  of  trans- 
portation to  the  market  are  equal  to  the 
Fig.  26.  DiTTERENCEs  differences  in  the  cost  of  cultivation  in 
fbbiqh^s:"''''"'     '""^     the   last  case.     This  is  represented  in 


162  USANCE  AND  RENT  [Pt.II 

Figure  26.  When  it  becomes  necessary  to  resort  to  tract  B  for 
products  on  which  the  transport-costs  would  be  two  bushels 
per  acre,  a  rent  on  A  would  arise  equal  to  the  freight  charges ; 
and  so  on  as  in  the  preceding  examples.^ 

§  6.  The  general  doctrine  of  rent.  The  principle  in  each 
of  these  three  simple  cases  is  reducible  to  the  one  proposition, 
that  the  rent  (in  money)  of  an  agent  is  equal  to  the  excess 
of  the  price  of  its  gross  products  above  (money)  costs  (other 
than  the  rental)  needed  to  obtain  them  and  take  them  to  mar- 
ket. This  is  equally  true  when  the  three  conditions  are  com- 
bined in  varying  proportions,  the  excess  being  partly  due  to 
a  larger  product,  and  partly  to  lower  costs  either  of  cultivation 
or  of  transportation. 

The  comparison  of  quantities  of  products  might  be  made 
in  terms  of  bushels,  pounds,  tons,  yards,  etc.,  provided  that 

8  It  need  liardly  be  said  that  this  figure  represents  a  formal  regu- 
larity of  gradations  of  freight  rates  not  to  be  found  in  reality.  This 
is  a  schematic  representation,  not  an  actual  pliotograph.  If  a  naviga- 
ble stream  or  a  good  turnpike,  or  a  railroad,  should  run  from  D  to 
M,  then  a  point  such  as  D  more  distant  from  the  market  in  miles, 
would  be  much  nearer,  measured  by  costs,  than  would  a  point  2b  from 
which  goods  must  be  drawn  in  wagons  over  dirt  roads.  The  general 
principle  is  valid  when  expressed  in  reference  to  money-costs  rather 
than  with  reference  to  actual  miles;  that  the  price  of  the  usance  con- 
forms to  the  net  price  of  the  product  after  paying  tlie  cost  of  bringing 
it  to  market. 

It  must  not  be  thought  that  in  these  examples  the  order  in  which 
cultivation  proceeds  from  more  fertile  to  less  fertile,  from  more  easily 
to  less  easily  cultivated,  from  nearer  to  more  distant  fields,  is  intended 
as  a  historical  account.  This,  too,  is  merely  schematic.  Changes  in 
the  methods  of  agriculture  may  cause  some  kinds  of  fields  to  become 
less,  others  more  productive  at  a  later  stage  than  when  first  taken 
into  use.  Tracts  A  and  B  might  be  first  taken  up  because  of  greater 
fertility  (in  Figure  24),  or  of  ease  of  cultivation  with  the  tools  then 
used  ( Figure  25 ) ,  or  on  account  of  nearness  to  the  market  ( in  Figure 
26)  ;  and  later  after  drainage,  or  with  the  invention  of  better  tools,  or 
after  a  new  road  had  been  built,  tracts  C  and  D  miglit  be  found  more 
productive  than  A  and  B.  We  are  not  concerned  here  with  the  his- 
torical order  of  change,  but  with  the  point  of  equilibrium  of  competitive 
rent  under  any  given  set  of  conditions. 


Ch.  15]  PRINCIPLES  OF  RENT  163 

all  of  the  products  were  of  the  same  kind  and  quality.  Like- 
wise the  comparison  of  costs  might  be  made  accurately  in 
terms  of  day's  labor  provided  labor  were  the  only  cost  and 
were  all  of  the  one  kind  and  value.  But  these  conditions  are 
rarely,  if  ever,  present.  To  compare  the  items,  therefore,  it 
is  necessary  to  express  them  all  in  common  terms  of  monetary 
prices.  A  comparison  may  thus  be  made  between  the  most 
varied  products,  and  between  costs  of  most  varied  kinds  and 
the  most  varied  kinds  of  agents. 

The  commercial  rent  paid  by  the  user  of  a  durative  agent 
of  any  kind  is  a  gross  sum  which  usually  is  more  (or  conceiv- 
ably may  be  less)  than  the  price  of  a  true  usance,  according 
as  repairs  and  depreciation  have  been  attended  to  by  the  bor- 
rower (see  Chapter  14,  section  3) .  A  net  or  true  rent,  however, 
is  that  which  leaves  the  use  bearer  in  condition  to  yield  an 
unchanging  income  (see  above,  section  2). 

§  7.  Dependence  of  rent  on  proportionality.  It  may  here 
be  clearly  seen  that  the  origin  and  the  existence  of  rent  is  de- 
pendent on  the  operation  of  the  law  of  proportionality.  If 
intensive  use  of  field  A  met  with  no  resistance  there  would 
be  no  motive  ever  to  cultivate  another  field.  A  whole  nation 
could  be  fed  from  the  single  acre  of  land.  But  in  fact,  ap- 
plying more  and  more  labor  and  other  agents  to  tract  A  will 
not  increase  the  crop  of  grain  proportionally.  In  applying 
any  fund  of  complementary  agents  a  point  is  found  where 
it  is  better  to  go  over  to  the  cultivation  of  the  tracts  B,  C,  D, 
successively,  each  less  fertile  (case  1),  or  more  difficult  to 
cultivate  (case  2),  or  less  accessible  and  costing  more  for 
transportation  (case  3),  than  to  go  on  cultivating  tract  A 
with  more  and  more  labor  or,  it  may  be,  at  higher  and  higher 
money  costs.  "When  this  is  done  the  return  imputable 
to  the  additional  (marginal)  unit  of  cost  on  the  intensive  mar- 
gin of  cultivation  in  A  just  equals  that  of  the  additional 
unit  on  the  extensive  margin  of  B,  C,  D,  etc.  There 
comes  about  a  static  equilihnum,  a  best  apportionment  of 
agents  to  the  different  tracts  under  the  existing  circumstances. 


164  USANCE  AND  RENT  [Px.  II 

This  best  apportionment  of  complementary  agents  has,  of 
course,  the  result  of  maximizing  the  net  incomes  from  the 
various  tracts.  The  better  agents  are  more  intensively  culti- 
vated than  the  poorer  agents  for  the  reason  that  in  this  way 
labor  is  most  advantageously  utilized.  This  difference  in 
degree  of  use  appears  generally  in  the  form  of  differences  in 
the  kinds  of  products  as  well  as  in  the  amounts,  each  agent 
being  used  for  the  purpose  in  which  it  promises  to  yield  the 
maximum  usance,  and,  consequently,  rental.  A  may  be  given 
to  commerce,  manufacturing  and  residences,  uses  of  varjdng 
degrees  of  intensiveness ;  B,  to  market-gardening,  C,  to  ordi- 
nary farming,  D,  to  grazing,  forestry,  and  other  extensive 
modes  of  use.  And  the  simple  guiding  principle  in  the  matter 
is  this :  that  each  thing  is  put  to  the  use  which  seems  to  prom- 
ise the  maximum  income.  This,  of  course,  is  true  of  labor, 
buildings,  tools  and  machinery  of  all  kinds,  as  well  as  of  land. 

§  8.  Rent  and  intensive  utilization.  The  origin  and  ex- 
istence of  usance-value  and  hence  of  rent  is  essentially  due 
to  the  limitation  of  supply  of  uses  in  the  better  grades  and 
not  to  the  existence  of  poorer  grades  forming  an  extensive 
margin  of  utilization.  If  A  were  the  only  grade,  rent  must 
arise  when  it  is  used  intensively.  If  in  accordance  with  the 
principle  of  proportionality  the  successive  units  of  labor  (or 
of  all  money  costs)  are  applied  so  that  they  become  less  ef- 
fective, usance-value  must  arise.  If  now,  B  is  there  wait- 
ing to  be  used,  the  rent  on  A  would  have  to  equal  about  2 
bushels  per  acre  before  cultivation  could  go  over  to  B.  The 
effect  of  the  presence  of  the  poorer  grade  B,  is  not  to  cause 
the  rent  on  A,  but  merely  to  check  the  rise  of  usance-value 
through  affording  a  substitute  good.  And  so,  in  turn  suc- 
cessively lower  grades  of  agents  become  part  of  the  supply 
as  rent  rises,  and  thus  they  limit  its  rise.  The  problem  of 
usance-value  and  of  rent  here  touches  on  the  border  of  the 
problem  of  the  value  of  the  complementary  agent,  labor,  and 
may  better  be  explained  under  wages.*    Rent  is  not  an  iso- 

*Thi8   is  the   same  principle   explained   above   under    usance-value, 


Ch.  15]  PRINCIPLES  OF  RENT  165 

lated  price  problem,  but  it  is  interrelated  with  that  of  the 
prices  of  all  agents  uniting  to  obtain  a  product. 

§  9.  Divergent  valuations  of  different  bidders.  In  ex- 
plaining the  differences  in  the  rents  of  agents  we  have  thus 
far  mentioned  as  affecting  the  result  only  the  limitation  and 
variation  in  the  physical  qualities  of  the  agents  themselves, 
w'hether  it  be  the  fertility  of  the  soil,  the  height  of  the  water- 
fall, the  mechanical  efficiency  of  the  machine,  the  convenience 
of  location,  or  anything  else.  These  are  solely  objective  dif- 
ferences, whereas  there  are  many  subjective  (that  is,  human, 
personal)  differences  that  influence  the  result,  causing  the 
individual  bidders,  either  borrowers  or  lenders,  to  value  a 
particular  usance  differently. 

It  has  been  shown  how  the  valuations  of  bidders  vary  in  the 
purchase  of  commodities,  and  it  is  no  less  true  that  the  valua- 
tions of  bidders  for  usances  vary.  Many  circumstances  make 
both  the  quantity  and  the  value  of  the  products  as  well  as  of 
the  costs  anything  but  a  fixed,  predetermined,  unchangeable 
amount  to  the  various  bidders.  A  durative  agent  often  has 
to  its  owner  both  a  value-in-use  and  a  value-in-exchange, 
a  usance  and  a  price,  and  the  two  may  be  approximately 
equal  or  very  unequal.  The  owner  of  a  farm  may  work  it 
himself,  or  being  old,  or  indolent,  or  incompetent,  or  more 
suitably  occupied,  he  may  prefer  to  let  the  farm  to  a  tenant. 
Where  the  owner  can  himself  manage  the  farm  he  has  a  re- 
serve-valuation below  which  he  will  not  let  it  to  any  tenant; 
whereas  in  the  other  case  he  is  in  the  position  of  an  urgent 
seller  (of  the  usance)  to  the  highest  bidder  (quality  of  ten- 
ant, security,  etc.,  as  well  as  amount  of  rent  being  consid- 
ered) .  This  does  not  mean  that  the  rent  is  necessarily  lower 
when  the  owner  can  not  use  the  agent  himself.  The  own- 
er's reserve-valuation  may  often  be  below  the  bid  of 
others. 

cli.  13,  sec.  4,  Effect  of  the  presence  of  one  agent  upon  the  usance- 
value  of  another.  Essentially  it  is  the  principle  of  substitution;  see  ch. 
4,  sees.  2-4. 


16G 


USANCE  AND  RENT 


[Pt.  II 


,7a -^ 


I 

I 


Rent 


^ 


^ 


400 

I 

I' 


Fio.  27. 


§  10.  Example  of  competing  bids.  If  there  are  several 
tenants  that  would  like  to  get  a  certain  farm,  their  maximum 
usance-valuations  mi<?ht  be  as  follows :  A,  $500 ;  B,  $475 ;  C, 
$450 ;  D,  $425 ;  E,  $400.     At  the  basis  of  each  bid  must  be  a 

forecast  of  the  net  usance  that 
the  bidder  anticipates  he  could 
make  from  it;  but  he  may  bid 
less  if  he  thinks  that  he  can 
thus  get  the  agent.  Each  bid- 
der would  count  his  own  labor 
at  the  figure  it  would  bring  if 
elsewhere  applied,  and  would 
estimate  some  return  on  what- 
ever stock  he  expected  to  put 
into  the  business.  Many  fac- 
tors of  psychic  income,  varying 
with  individual  tastes,  as  liking 
for  the  neighborliood,  condi- 
tions favorable  to  health,  near- 
ness to  schools,  etc.,  enter  into  the  actual  bid.  With  due 
allowance  for  these  differences,  A,  who  counts  on  a  net 
usufruct  of  25  more  than  B  does,  ought  to  be  the  more 
skilful  farmer,  but  this  is  merely  his  expectation,  and 
he  may  be  mistaken.  Even  in  this  case,  if  A  can  give 
security  or  can  convince  the  landlord  that  the  rent  will  be 
paid,  he  may  be  able  to  outbid  B  and  get  the  farm  for  a 
rent  of  $476.  Then,  if  his  forecast  was  correct,  he  would  clear 
$24  by  renting  this  particular  farm ;  and  in  addition  he  gets 
the  opportunity  to  apply  his  own  labor  and  earn  returns  on 
his  productive  agents.  This  situation  is  represented  in  Fig- 
ure 27. 

§  11.  Complexity  of  the  situation  lying  back  of  each  bid. 
It  should  be  noted  that  each  bidder's  valuation  implies  a  com- 

*  The  various  bidders  for  the  usance  of  a  particular  agent  have 
difTerent  valuations,  A  to  E.  The  valuation  of  each  bidder  is  his  esti- 
mate of  the  total  yield  less  the  other  costs  of  obtaining  the  products. 


Competing  Bids  of  Would- 
BB  Tenants.* 


Ch.  15]  PRINCIPLES  OF  RENT  167 

parison  of  the  agent  with  other  agents  more  or  less  nearly 
equal  to  this  one  in  its  qualities  and  usance.  The  opportunity 
of  a  place  to  work,  needed  by  each,  would  be  lacking  if  there 
were  but  one  farm  to  rent.  But  several  farms  are  in  the  neigh- 
borhood, and  the  knowledge  of  their  availability  is  a  part  of  the 
circumstances  influencing  the  bids,  as  is  also  the  chance  that 
each  man  has  of  moving  elsewhere  or  of  hiring  out  for  wages. 
If  in  fact  there  were  but  one  farm  and  no  other  possible  place 
to  earn  a  living,  the  maximum  bids  would  rise  greatly,  for 
each  bidder  would  reduce  to  the  uttermost  his  estimate  of  the 
value  of  his  own  services  to  be  deducted  from  the  gross  prod- 
uct. The  interrelation  between  the  amounts  attributable  to 
labor  and  to  the  farm  is  such  that  rent  and  wages  mutually 
affect  each  other.  In  fact,  as  bids  are  made  in  view  of  an  ex- 
isting situation,  rents  reach  some  degree  of  equilibrium  in 
a  neighborhood.  Each  tenant  has  a  farm  and  each  farm  a 
tenant,  rents  and  tenant's  income  being  kept  from  year  to 
year  closely  in  accord  with  the  level  of  individual  valuations 
(see  Chapter  7,  sections  7-9). 

§  12.  Personal  efficiency  as  affecting  the  valuation  of 
agents.  In  general  it  is  true  that  the  most  skilful  cultivator 
will  make  a  more  liberal  allowance  for  his  own  services  in  his 
bid  on  every  grade  of  farm,  for  on  every  farm  his  skill,  tho 
in  varying  degrees,  will  enable  him  to  get  a  larger  net  product 
than  his  competitors.  Despite  this  higher  valuation  of  his 
own  services,  the  most  skilful  cultivator  is  likely  to  be  the 
highest  bidder  for  the  best  agents.  The  best  agents  used  for 
a  particular  purpose  tend  to  get  into  the  hands  of  the  best 
managers,  for  the  better  the  agents  to  which  superior  skill  is 
applied,  the  greater  are  its  results  as  compared  with  less  skill. 
Thus  in  many  localities  this  distribution  of  ability  in  accord- 
ance with  fertility  is  so  marked  that  it  is  proverbial:  "poor 
lands,  poor  men."  But  when  a  man's  ability  is  of  a  special 
kind,  either  by  natural  talent  or  by  training,  he  may  be  able 
to  succeed  well  in  one  industry  tho  failing  in  another  that  calls 
for  no  more,  but"  merely  different,  ability.    For  example  a 


108  USANCE  AND  RENT  [Pt.  II 

good  general  farmer  may  be  a  poor  florist  or  market  gar- 
dener, a  good  lumberman  may  be  a  poor  furniture  maker. 

§  13.  Variability  of  rents.  Rentals  of  farms,  of  regular 
residences  and  of  stores,  used  from  year  to  year,  are  compara- 
tively stable.  Summer  rates  for  rooms  in  some  college  towns 
where  there  is  a  summer  school  are  one-half  the  regular  rates. 
Rents  for  unoccupied  summer  cottages  rise  quickly  if  the 
weather  is  warm  early  in  the  season,  for  tenants  are  willing 
to  pay  "anything  within  reason."  Livery  charges  in  many 
places  are  higher  Sundays  than  on  week  days;  in  college 
towns  are  higher  both  Saturdays  and  Sundays ;  and  on  festal 
occasions  such  as  "Junior  proms"  and  "Senior  weeks,"  an- 
tique equipages  are  dravna  from  hiding  to  lure  incredible 
gums  from  the  devotees  of  society.  Decoration  Day  and 
Fourth  of  July,  if  it  is  pleasant  weather,  boat  hire  is  likely  to 
be  doubled.  In  these  cases  the  supply  at  any  price  can  be 
only  slightly  increased,  for  the  time,  and  the  demand  carries 
off  the  whole  available  stock  at  abnormally  high  prices.  The 
rent  appears  to  the  regular  patrons  to  be  fixed  arbitrarily  by 
the  seller;  but  a  study  of  the  conditions  will  show  that  the 
rate  fixed  is  approximately  the  correct  market-price  for  the 
conditions,  one  that  just  carries  off  the  supply  and  leaves  no 
efficient  demand  unsatisfied. 


PART  III 
VALUABLE  HUMAN  SERVICES,  AND  WAGES 


CHAPTER  16 
HUMAN  BEINGS  AND  THEIR  ECONOMIC  SERVICES 

§  1.  Man  and  wealth  as  economic  agents.  §  2.  Labor  as  contributing 
to  iucome.  §  3.  Psychic  income  gained  in  play.  §  4.  Play-  and  labor- 
motives  mingled.  §  5.  Disagreeable  labor.  §  6.  Physical  dilTerences 
among  men.  §  7.  Comparative  strength  of  men  and  women.  §  8.  Dif- 
ferences in  natural  intelligence.  §  9.  Talent  and  training  as  factors  of 
ellicioncy.  §  10.  Moral  qualities  required  in  industry.  §  11.  Necessary 
combination  of  qualities.  §  12.  Inequality  of  talents  shown  by  biologic 
studies. 

§  1.  Man  and  wealth  as  economic  agents.  The  whole 
stock  of  ecouomie  agents  in  a  community  at  any  moment  may 
be  classified  as  wealth  and  men,  objective  goods  and  human 
beings.  In  our  study  thus  far  of  value  and  price,  we  have 
limited  our  illustrations  to  objective  commodities,  and  to  the 
uses  of  the  objective  (non-human)  agencies  of  production. 
Little  has  been  said  about  the  other  great  class  of  economic 
agents,  human  beings.  Yet  everything  that  has  been  said  as 
to  the  fundamental  principles  of  value  and  price,  applies 
fully  to  the  uses  (services)  of  men.  Indeed  it  is  only  by  an 
abstract  method  of  treatment  of  wealth  that  the  services  of 
men  have  appeared  to  be  left  out  of  consideration.  In  truth 
the  presence  of  men  is  always,  and  must  always  be,  implied 
and  understood  in  any  study  of  the  value  of  wealth.  This 
means  not  merely  that  man  is  the  evaluater,  the  chooser  of 
goods  (for  of  course  a  world  without  mankind  would  be  a 
world  where  value  was  nonexistent) ;  this  means  also  that 
man  is  the  doer  of  acts  that  themselves  have  value  and  the 
doing  of  which  profoundly  affects  the  whole  economic  situa- 
tion in  which  objective  goods  are  valued.    Labor  is  a  com- 

171 


172  VALUABLE  HUMAN  SERVICES,  AND  WAGES       [Pt.  Ill 

plementary  agent,  some  portion  of  which  is  indispensable  to 
the  use  of  wealth.  Within  limits  man's  efforts  and  goods 
may  be  mutually  substituted.  Each  act  a  man  performs,  ex- 
pressing, as  it  does,  a  choice,  implies  some  economic  valuation 
in  relation  to  his  other  acts  and  to  wealth.  In  applying  his 
own  labor  to  producing  goods  for  his  own  use,  or  in  selling 
his  goods  or  his  labor  to  others,  his  labor  is  being  constantly 
valued  and,  only  less  often,  priced. 

Man's  labor  is  valued  or  priced  because,  like  other  agents 
(non-human  agents),  it  is  serving  for  the  gratification  of  de- 
sires. In  the  process  of  gratifying  human  desires  the  man 
is  correlative  with  the  machine.  Both  have  within  them  the 
capacity  of  yielding  services  or  uses,  and  the  services  of  the 
man  are  valued  in  the  same  way  as  the  uses  of  the  machine. 
The  labors  of  the  physician,  of  the  blacksmith,  or  of  the  day 
laborer  are  bought  just  as  is  the  use  of  the  rented  house  or 
of  the  hired  taxicab.  This  parallelism  is  somewhat  obscured 
by  the  ambiguity  of  the  term  "labor"  which  is  used  to  mean 
not  merely  the  service  (labor),  but  the  people  (laborers)  who 
render  the  service.  In  such  phrases,  for  example,  as  "labor 
and  capital,"  or  "land  and  labor,"  the  term  "labor"  is  used 
of  the  persons  who  perform  the  labor. 

§  2.  Labor  as  contributing  to  income.  In  the  processes 
of  production  and  of  valuation  man  plays  a  dual  role.  He  is 
first  the  economic  subject — the  being  who  has  desires  and 
makes  choices — but  also  he  is  an  economic  agent,  an  instru- 
mentality in  the  gratification  of  desires — his  own  as  well  as 
those  of  other  people.  This  is  quite  simple  in  the  case  of 
chattel  slavery.  To  the  master,  his  slave  is  on  the  same  eco- 
nomic plane  with  his  horse,  his  machinery,  or  his  land — each 
is  valued  simply  for  the  use  it  yields.  The  free  man,  how- 
ever, is  his  own  master,  a  person  whose  desires  and  choices  are 
the  starting  point  in  the  study  of  value ;  and  at  the  same  time 
he  is  an  agent  in  the  gratification  of  his  own  desires,  directly 
and  indirectly.  Not  only  do  other  people  by  their  services 
contribute  toward  the  gratification  of  our  desires,  but  we 


Ch.  16]     HUMAN  BEINGS— THEIR  ECONOMIC  SERVICES  173 

actually  render  many  services  to  ourselves  in  such  acts  as 
dressing,  shaving,  polishing  shoes,  cooking,  making  clothes, 
etc,  which  form  a  very  considerable  part  of  most  persons' 
incomes. 

Human  efforts  have  the  same  relation  to  desires  that  the  uses 
of  material  goods  have.  Labor  contributes  to  income  either 
directly  (psychic)  or  indirectly  in  the  changes  it  causes  in 
material  goods.  To  be  an  economic  good  human  effort  must 
meet  either  a  desire  in  the  laborer  himself,  or  a  demand  from 
some  other  person.  Many  services  afford  an  income  directly 
which  is  immediately  enjoyed.  A  tropical  potentate  has  an 
attendant  to  fan  him,  another  to  carry  an  umbrella,  and  a 
third  to  beat  a  tom-tom ;  a  humble  American  citizen  is  shaved, 
doctored,  sung  to  and  played  for,  or  is  his  own  barber,  doctor, 
and  entertainer.  The  income  in  such  cases  is  directly  enjoyed 
in  personal  comfort,  in  the  consciousness  of  heightened  beauty, 
in  the  feeling  of  self-esteem.  Something  of  value  is  thus 
created  but  takes  no  material  form  apart  from  the  consumer 
(who  may  be  the  laborer  himself). 

But  the  results  of  most  labor  may  be  seen  to  rest,  at  least 
temporarily,  in  some  material  form.  Effort  is  put  upon  a 
material  thing  to  be  used  later.  The  work  of  the  waiter  in 
spreading  and  arranging  the  table  is  not  an  immediate  service, 
for  it  is  embodied  in  material  form  an  hour  or  two  before  the 
meal.  The  service  of  cook,  no  less  than  that  of  gardener  and 
butcher,  is  put  into  material  form  before  it  comes  to  the 
consumer.  The  woodman  fells,  cuts  up,  and  splits  a  tree, 
and  piles  it  at  the  door,  putting  his  labor  into  a  good  to  be 
consumed  months  afterward.  But  whether  labor  is  embodied 
or  is  not  embodied  in  material  form,  its  economic  significance 
lies  in  the  fact  that,  like  wealth,  it  provides  valuable  uses 
(services)  to  men;  that  is,  it  contributes  to  income.* 

1  Formerly  the  productiveness  of  labor  was  said  to  depend  upon 
this  condition  of  embodiment  in  abiding  material  form.  According 
to  the  view  in  question,  the  bartender  mixing  drinks  which  would 
be  quaffed  a  moment  later  was  to  be  called  a  productive  laborer  be- 


174  VALUABLE  HUMAN  SERVICES,  AND  WAGES       [Pt.  Ill 

§  3.  Psychic  income  gained  in  play.  When  we  consider 
the  fact  that  this  income  may  be  directly  in  psychic  form,  it 
becomes  difficult  to  justify  on  economic  grounds  the  contrast 
usually  supposed  to  exist  between  labor  and  play.  Play — 
that  seems  to  our  modern  commercial  minds  the  very  negation 
of  economics.  Work,  work,  to  fill  the  granaries  fuller,  to  build 
larger  houses,  to  produce  more  material  goods,  to  increase  the 
bank  accounts!  But  is  not  such  a  view  mere  miserliness  in 
disguise  ?  The  aim  of  all  human  effort,  whether  work  or  play, 
is  psychic  income.  The  life  of  man  is  a  constant  adjustment 
of  his  own  desires  and  capacities  to  the  outer  world,  partly  by 
changing  objects  in  creating  wealth,  partly  by  changing  him- 
self through  the  use  of  wealth  and  of  his  own  faculties.  Nor- 
mal and  healthy  human  beings  find  a  keen  pleasure  in  the 
putting  forth  of  those  powers  that  develop  and  preserve 
strength,  activity,  and  health.  This  is  the  purpose  of  most  of 
the  sports,  games,  and  pastimes  found  in  every  land  and  time. 
In  the  mere  putting  forth  of  the  powers  of  mind  and  muscle 
there  is  a  joy  felt  by  children  and  men  of  all  races,  and  this 
is  heightened  by  companionship,  emulation,  and  even  by  a 
spice  of  danger.  We  may  call  labor  any  human  effort  having 
as  its  motive  something  outside  of  the  gratification  in  the 

cause  his  services  were  embodied  in  material  form;  whereas  the  lec- 
turer, the  singer,  the  teacher,  and  the  judge  were  regarded  as  un- 
productive laborers  because  the  results  of  their  labors  were  not  em- 
bodied in  material  form,  but  went  at  once  into  psychic  income.  Whether 
or  not  the  service  has  for  a  moment  embodied  itself  in  material  form 
is  not  of  the  most  essential  economic  import.  The  presence  of  the 
waiter  is  as  essential  to  the  well-served  dinner  as  are  the  polished  silver 
and  china,  or  as  the  well-cooked  food.  The  distinction  in  question 
is  not  now  made  by  most  economists.  But  a  similar  distinction  is 
inconsistently  preserved  by  many  writers  who  call  unproductive  the 
goods  yielding  direct  enjoyment  (houses,  carriages,  etc.)  and  call 
only  those  material  agents  productive  (as  tools,  machines,  etc.)  whose 
product  is  embodied  for  a  time  in  material  form.  If  a  distinction  is 
to  be  made  between  productive  and  unproductive  labor  it  will  have 
to  be  found  in  the  occasional  contradiction  between  value  and  utility; 
that  is,  in  the  result  of  labor  as  regards  social  welfare.     (See  ch.  39.) 


Ch.  16]     HUMAN  BEINGS— THEIR  ECONOMIC  SEIiVICES  175 

action  itself.  Actions  which  have  no  objective  aim,  no  pur- 
pose (except  of  course  making  the  points  of  the  game,  e.g., 
crossing  the  goal)  outside  the  pleasure  of  the  mere  doing,  are 
play.  Play  is  not  dependent  on  a. useful  objective  result  later 
to  be  enjoyed,  but,  like  beauty,  is  its  own  excuse  for  being. 
The  distinction,  therefore,  between  work  and  play  is  one  as 
to  the  superficial  form  of  expressing  human  energy,  rather 
than  as  to  the  fundamental  economic  result  as  it  has  usually 
been  considered.  The  nerve-tired  student  goes  out-of-doors  to 
bat  the  tennis  ball,  making  no  change  in  the  material  world, 
except  to  wear  out  his  shoes  and  to  lose  the  ball,  but  finding 
that  hour  rich  in  the  joy  of  life.  When  the  patient  fisherman 
sitting  in  his  boat,  was  asked,  "What  luck?"  he  answered 
cheerily,  as  he  threw  out  another  line,  "Just  the  luck  of  a  good 
time." 

If  properly  chosen,  play  strengthens  and  vivifies  both  soul 
and  body,  leaving  an  afterglow  of  health  and  happiness.  Such 
play  is  directly  resultant  in  psychic  income,  necessarily  in- 
volves a  personal  valuation,  and  if  taken  with  due  regard  to 
present  duties  and  to  future  needs  (aye,  there  's  the  rub!)  is 
worthy  of  a  place  in  the  scale  of  the  socially  productive.  The 
choice  of  sports  and  temperance  in  their  pursuit  are  among  the 
surest  tests  of  wisdom  in  men  and  in  societies.  Not  to  know 
how  to  play,  and  how  to  live  joyously  in  the  hours  free  from 
business  cares,  is  just  as  surely  a  cause  of  real  poverty  as  not 
to  know  how  to  work.  For  real  poverty  is  lack  of  psychic 
income.  Some  persons  can  work  effectively,  others  can  play 
effectively  (which  does  not  always  mean  great  expertness). 
A  rich  life,  truly  successful,  is  possible  only  to  those  who  can 
combine  the  abilities  both  to  work  and  to  play.  A  love  of 
vigorous  play  no  less  than  the  power  of  sustained  work,  marks 
the  dominant  and  progressive  peoples  of  the  earth. 

§  4.  Play-  and  labor-motives  mingled.  Actions  of  a  second 
kind  are  those  pleasurable  in  themselves  and  at  the  same  time 
leaving  an  objective  result.  The  hunter  enjoys  the  day  better 
if  he  returns  with  well-filled  bags  of  game.     In  extreme  cases 


176  VALUABLE  HUMAN  SERVICES,  AND  WAGES       [Pt.  Ill 

the  distinction  between  the  sportsman  and  the  "pot-hunter"  is 
not  hard  to  find.  It  is  a  matter  of  emphasis ;  the  one  has  his 
chief  joy  in  the  sport,  the  other  in  the  material  results  of  the 
sport.  But  always  the  motives  are  somewhat  mingled.  The 
study  of  primitive  peoples  shows  that  all  of  the  more  important 
industrial  activities  were  first  of  the  nature  of  play.  The  prim- 
itive man  did  only  the  things  he  liked  to  do,  unless  driven  by  the 
direst  want.  The  whole  tribe  danced  and  sang,  went  through 
intricate  dramatic  ceremonials  before  going  upon  a  hunt  or 
planting  corn,  made  a  tournament  of  the  hunt  itself,  and  even 
of  hoeing  and  reaping  the  crops,  and  concluded  with  festivals 
in  celebration  of  the  successful  hunt  and  of  the  bountiful 
harvest,  to  the  delight  of  every  member  of  the  tribe.  Thus 
were  men  gradually  habituated  to  actions  having  an  object  out- 
side and  beyond  themselves. 

§  5.  Disagreeable  labor.  Actions  of  a  third  kind  are 
those  disagreeable  in  themselves,  but  performed  by  force  of 
will,  because  leading  to  some  desired  result.  A  large  part  of 
what  is  called  labor  to-day  is  of  this  kind,  either  like  taking 
medicine — positively  disagreeable  but  endured  for  the  hope 
of  ulterior  benefits — or  in  the  milder  cases  only  relatively  un- 
desirable, being  not  what  one  would  most  prefer  to  do  at  the 
time.  The  end  sought  is  an  objective  good  resulting  from  the 
labor. 

The  social  ideal  clearly  is  that  all  labor  should  be  made 
desirable.  Social  dreamers  love  to  picture  a  day  when  all 
shall  find  for  effort  a  full  reward  in  the  mere  doing — the 
reward  of  the  artist,  of  the  scholar,  of  the  saint — ^in  addition 
to  the  objective  result  in  economic  wealth.  In  some  occupa- 
tions possibly  we  are  slowly  nearing  this  ideal.  Not  only  in 
the  professions  and  in  the  esthetic  arts,  but  in  commerce,  in 
mechanics,  and  in  the  humblest  walks  of  life  are  found  men 
free  from  envy,  rejoicing  in  their  daily  tasks.  Such  is  the 
normal  feeling  of  the  healthy  optimist.  And  yet  in  every 
serious  occupation  there  are  numberless  moments  and  occa- 
sions when  the  spirit  flags  and  only  hard  necessity  holds  men 


Ch.  16]     HUMAN  BEINGS— THEIR  ECONOMIC  SERVICES  177 

to  their  tasks.  The  complicated  and  often  long-continued 
tasks  of  modern  industry  can  not  be  accomplished  by  mere 
play;  neither  can  they  by  labor  done  only  with  immediate 
pleasure.  The  dilettante  does  not  go  far  or  long  or  steadily; 
the  real  tasks  of  the  world  are  done  by  men  that  labor,  now 
with  joy,  now  wearily,  but  unfailingly.  A  large  part  of  the 
heavy  monotonous  hand-labor  is  an  evil  just  because  it  yields 
so  little  of  the  joy  of  workmanship  and  is  so  purely  drudgery 
endured  for  the  day's  wage  at  the  end. 

§  6.  Physical  differences  among  men.  As  material  things 
differ  in  their  uses  and  fitness  to  yield  economic  uses,  so  do 
men  differ  in  their  powers  of  labor.  The  most  obvious  dif- 
ference is  in  physical  strength,  which  varies  with  age,  indi- 
vidual, race,  and  sex.  Differences  due  to  age  are  the  most 
obvious.  The  child,  at  first  weak,  grows  toward  his  maximum 
of  physical  strength,  which  he  attains  before  his  fullest  intel- 
lectual capacity.^  The  period  of  maximum  physical  working 
power  lasts  fifteen  to  twenty-five  years  according  to  the  indi- 
vidual and  to  the  kind  of  work,  and  then  gradually  declines 
as  the  old  worker  approaches  again  the  inefficiency  of  the 
child.  Families  and  strains  of  stock  differ  notably  in  physical 
powers ;  one  excels  in  stature,  another  in  development  of  mus- 
cle. The  differences  within  families  are  inexplicable;  some- 
times one  brother  excelling  in  one  thing,  the  other  in  another. 
The  physically  perfect  man  is  a  rare  product.  Among  three 
thousand  students  are  but  twoscore  endowed  with  the  remark- 
able combination  of  lungs,  heart,  muscle,  nerve,  and  char- 
acter, that  makes  possible  the  finest  athletes.  The  natural 
dexterity  of  some  workers  marvelously  surpasses  that  of  the 

2  In  1910  there  were  nearly  2,000,000  children  of  the  age-group  be- 
tween ten  and  fifteen  years  reported  as  engaged  in  gainful  occupations 
in  the  United  States,  most  of  them  in  agriculture.  Two-thirds  of  the 
total  number  were  boys,  those  occupied  being  one-fourth  of  all  boys  of 
that  age-group.  In  the  South,  however  (comprising  the  three  southern 
geographical  divisions  in  the  census),  nearly  half  the  boys  of  that  age- 
group  were  in  gainful  occupations,  while  in  the  North  only  one-eighth 
were. 


178  VALUABLE  HUMAN  SERVICES,  AND  WAGES       [Pt.  Ill 

average  man,  and  seemingly  is  due  not  to  special  training,  but 
to  natural  qualities  of  sight,  touch,  nervous  reaction,  or  mus- 
cular energy.  The  national  and  racial  differences  in  work- 
ing power,  even  in  the  simplest  tasks,  are  marked,  but  are  diffi- 
cult to  explain,  as  so  many  influences,  customs,  habits  of  life, 
and  varieties  of  diet  modify  the  result.  We  can  not  tell  how 
much  of  the  Englishman's  great  superiority  over  the  East 
Indiaman  is  due  to  individual  native  differences  of  mind  and 
body,  how  much  to  the  social  environments  in  which  they  have 
lived.  Certainly  tho,  the  difference  is  not  mainly  one  in 
size;  in  the  Boxer  War  the  little  brown  men  of  Japan  out- 
marched all  the  others.  Certainly  fiber  counts  for  more  than 
bulk,  and  character  for  more  than  muscle. 

§  7.  Comparative  strength  of  men  and  women.  A  dif- 
ference in  the  physical  strength  of  the  sexes  is  found  in  some 
degree  throughout  the  world,  but  it  would  appear  to  be  far 
more  marked  in  civilized  than  in  savage  communities.  The 
records  made  at  the  field-games  in  the  women's  colleges  are 
improving;  but  still  fall  far  short  of  the  men's  records  in  any 
leading  college :  in  the  hundred-yard  dash,  thirteen  seconds  as 
against  nine  and  a  fraction ;  in  the  high  jump,  fifty-two  inches 
as  against  six  feet  and  over.  The  muscular  force  of  American 
college  women  as  tested  in  various  gymnasiums  (average  of 
all  students  in  college)  is  little  more  than  one  third  that  of 
men.  The  average  strength  of  back  for  women  is  35  per 
cent  that  of  men,  the  average  strength  of  legs,  41  per  cent, 
and  the  average  strength  of  right  forearm,  38  per  cent.  This 
is  an  abnormal  difference.  The  natural  and  possible  strength 
is  more  nearly  attained  by  men  than  by  women  under  our 
social  conditions.  Women  escape  the  physical  toil  which 
strengthens,  but  not  the  mental  strain  which  kills.  Men 
carry  more  of  the  wood,  but  the  women  not  less  of  the  wor- 
ries. A  fairer  test  is  applied  among  peasants  in  field-work  in 
France  and  Germany,  where  the  strength  of  women  is  found  to 
be  about  two  thirds  that  of  men.  American  women  should 
do  and  will  do  more  to  attain  their  natural  strength  as  we 


Ch.  16]     HUMAN  BEINGS— THEIR  ECONOMIC  SERVICES 


179 


attain  sounder  ideas  of  education  and  saner  modes  of  living. 
§  8,  Differences  in  natural  intelligence.  Mental  qualities 
are  not  easily  distinguishable  from  physical  qualities,  if  in  the 
physical  are  included  keenness  of  eye,  quickness  of  nerve,  and 
even  superior  judgment  of  materials,  tools,  methods,  etc. 
]\Ioreover,  mental  ability  is  a  very  complex  idea.  It  may  refer 
to  one  of  the  many  different  qualities  of  mind,  to  quickness 
of  observation,  talent  for  color,  form,  harmony,  to  memory  or 
imagination,  to  readiness  in  speech,  to  systematic  habits  of 
thought,  to  power  of  intense  and  prolonged  mental  applica- 
tion, to  mathematical  power  in  various  directions,  to  philo- 
sophical capacity,  that  is,  a  capacity  to  discover  the  more  far- 
reaching  causes  of  things.  These  qualities  unite  in  unending 
combinations  to  produce  that  kaleidoscopic  variety  of  person- 
ality which  makes  the  world  so  interesting.  Some  men  the 
world  calls  geniuses  have  lacked  some  of  these  qualities  al- 
most entirely.  Others  who  in  most  respects  are  either 
feeble-minded  or  insane 
(called  idiot  savants)  have 
shown  an  uncanny  talent 
in  music,  or  in  mathe- 
matics, the  very  subject 
which  is  the  stumbling 
block  for  many  otherwise 
bright  minds. 

Fig.    28.     BiNET    Test   in    an    Elemkntarv   School. 

By  this  set  of  psychological  tests  the  children  testing  "at  age"  or 
but  one  year  above  or  below  (accoimted  normal),  were  77.3  per  cent,  of 
the  total  (of  whom  35.8  per  cent  tested  at  age).  Those  testing  two 
to  four  years  above  age  (supernormal)  were  4.2  per  cent  of  the  total. 
Tliose  testing  two  to  seven  years  below  age  (subnormal)  were  18.5  per 
cent  of  the  total.  Some  children  testing  subnormal  are  simply  slow  of 
development  and,  as  they  mature,  become  normal  and  sometimes  super- 
normal. But  on  the  other  hand,  many  Of  the  younger  children  testing 
almost  normal  will  develop  very  little  mentally,  and  at  lifteen  will  be 
coveral  years  below  age.  This  in  part  explains  the  failure  of  so  many 
children  to  attain  grades  above  the  fourth,  as  shown  in  Figure  29,  bclov/. 


180  VALUABLE  HUMAN  SERVICES,  AND  WAGES       [Pt.  Ill 

Each  of  these  natural  mental  traits  has  its  peculiar  part  in 
fitting  the  man  for  some  kind  of  work,  and  the  absence  or 
weakness  of  any  one  of  them  increases  the  difficulty  of  qualify- 
ing as  an  efficient  worker  in  some  occupations.  Native  intelli- 
gence shortens  the  time  needed  for  preparation  in  any  calling, 
hastens  new  methods,  decreases  the  cost  of  supervision,  saves 
materials,  tools,  and  time,  diminishes  loss  from  breakage, 
makes  possible  the  use  of  finer  machinery  and  better  appli- 
ances, and  imparts  those  subtler  qualities  that  distinguish  the 
best  from  the  mediocre  products.  It  is  impossible  to  measure 
these  factors  of  native  ability  exactly,  tho  the  psychological 
tests  recently  devised  are  giving  remarkable  results.  But  in 
every  school  children  in  all  their  activities  show  marked  differ- 
ences in  traits,  which,  we  all  believe,  are  inherited  in  certain 
families.  Mental  capacity  of  the  higher  order  develops  more 
slowly  and  longer  than  do  the  physical  powers  and  the  senses. 
Judgment  and  wisdom  are  the  fruits  only  of  a  life  rich  in 
experience. 

§  9.  Talent  and  training  as  factors  of  efficiency.  It  is  im- 
possible to  measure  exactly  the  parts  that  natural  talent  and 
acquired  ability  play  in  determining  any  person's  efficiency. 
Two  men  sitting  side  by  side  in  an  examination,  get  the  same 
grade;  one  of  them  has  had  excellent  preparation  from  child- 
hood, and  all  the  opportunities  that  money,  travel,  and  cul- 
tured associates  can  give;  the  other,  under  great  difficulties, 
has  prepared  in  a  country  district  school  with  a  little  coach- 
ing now  and  then,  and  struggling  against  great  odds,  has  at 
last  entered  college.  The  same  grade  does  not  mean  either 
that  in  their  natural  ability  or  in  their  training  in  this 
particular  subject,  they  are  equal.  Yet  the  grade  is  the 
best  expression  to  be  had  of  their  efficiency  in  the  particular 
work. 

One  person  with  great  natural  musical  ability  may  have 
lacked  alike  good  opportunities  of  study  and  the  health  and  in- 
dustry to  gain  skill  by  long  practice ;  while  another  with  less 
natural  ability  but  more  favored  in  health  and  in  education 


Ch.  16]     HUMAN  BEINGS— THEIR  ECONOMIC  SERVICES  181 

will  attain  to  a  much,  greater  success  both  artistically  and 
economically  as  composer,  performer,  or  director  of  music. 

Similarly  the  net  economic  quality  of  an  artizan,  an  engi- 
neer, a  lawyer,  a  business  man,  a  worker  of  any  kind,  is  a  re- 
sultant of  education  and  native  talent,  which  along  a  broad 
zone  are  interchangeable,  each  in  some  degree  indispensable, 
each  supplementing  the  other.  Any  ability  may  be  helped  by 
education  in  the  broad  and  true  sense,  tho  a  fool  cannot 
be  made  wise  by  training,  and  tho  many  a  potential  genius 
doubtless  has  been  dwarfed  in  dusty  schoolrooms  by  stupid 
teachers.  Education  increases  adaptability  and  enables  a 
trained  mind  to  outstrip  an  untrained  mind  of  greater  natural 
power.  Education  makes  direction  easier,  fits  for  higher  tasks, 
and  decreases  the  difficulty  of  cooperation. 

By  education  in  this  connection  should  be  understood  not 
merely  knowledge  gained  in  schoolrooms  and  by  the  aid  of 
books  and  teachers,  but  every  sort  of  experience  and  activity 
of  mind  and  body  which  helps  the  natural  capacities  of  the 
man  to  grow  and  strengthen.  The  subjective  conditions,  the 
eager  mind  and  the  strong  character,  most  often  bred  of  neces- 
sity and  deprivation,  are  more  valuable  equipments  for  life's 
work  than  is  unheeded  or  half-comprehended  schoolroom  in- 
struction. Hence  the  business  man's  usual  skepticism  of  the 
practical  benefits  of  ** higher  education"  in  the  more  limited 
sense  as  applied  to  pampered  youth  with  indolent  minds. 

§  10.  The  moral  qualities  required  in  industry.  The 
moral  qualities  of  the  worker  are  increasingly  important  as 
society  grows  more  complex.  But  the  need  of  a  particular 
moral  quality  is  relative  to  the  special  task  in  hand.  Honesty 
is  needed  in  the  bank  teller,  but  he  need  not  spoil  a  good 
story.  The  champion  bronco-buster  of  Arizona  is  not  a  Sun- 
day-school superintendent.  So,  discipline,  obedience,  self- 
control,  regularity,  and  punctuality  are  needed,  for  more  and 
more  in  these  days  business  is  run  by  the  watch.  Confidence, 
patience,  good  temper,  in  fact  all  the  virtues  in  the  calendar 
are  necessary  at  some  time  and  place,  and  most  of  them  are 


182  VALUABLE  HUIklAN  SERVICES,  AND  WAGES       [Px.  Ill 

needed  all  the  time  in  business.  Places  may  be  found  in  our 
developed  society  for  those  who  are  deficient  in  some  of  these 
qualities  (it  is  fortunate  that  it  is  so),  but  these  are  the  poorer 
places.  Many  men  fail  to  recognize  all  the  qualities  necessary 
for  success,  and  few  are  able  to  understand  the  cause  of  their 
own  failures.  Blind  to  their  own  faults,  many  are,  for  lack 
perhaps  of  one  trait  which  to  themselves  seems  insignificant, 
dropped  down  one  notch  after  another  in  the  scale  of  industry, 
and  equally  blind  to  the  true  cause  of  success  in  their  rivals, 
they  rail  against  the  unjust  fates. 

§  11.  Necessary  combination  of  qualities.  Skill  and  ca- 
pacity in  industrial  tasks  is  a  resultant  of  many  qualities. 
The  simplest  task  calls  for  a  combination  of  physical  force 
and  of  judgment — even  the  digging  of  a  ditch  or  the  fitting 
of  a  stovepipe.  For  most  industrial  tasks  rarer  combinations 
of  qualities  are  required.  The  retail  salesman  must  be  neat, 
punctual,  polite,  and  long  suffering,  A  confidential  clerk  must 
have  discretion,  judgment,  and  other  moral  qualities  in  an  un- 
usual combination.  The  substitution  of  qualities  is  possible 
within  limits;  a  rare  quality  may  make  amends  for  the  lack 
of  a  commoner  one,  and  a  man  may,  because  of  peculiar  fit- 
ness in  some  regards,  continue  to  hold  a  position  for  which 
in  other  ways  he  is  little  fitted.  The  rarest  and  most  valued 
worker  is  one  uniting  many  good  qualities  and  fitted  to  deal 
with  emergencies.  The  economic  efficiency  of  the  worker  of- 
ten is  no  stronger  than  its  weakest  link.  A  most  frequent  use 
for  training  is  found  in  the  fact  that  strengthening  some  one 
weak  quality  may  raise  the  total  efficiency  in  a  remarkable 
degree. 

§  12.  Inequality  of  talents  shown  by  biologic  studies. 
The  political  philosophy  of  the  eighteenth  century  was  based 
on  the  idea  of  natural  rights  and  natural  equality.  Even  so 
shrewd  an  observer  as  Adam  Smith,  misled  by  the  prevailing 
view,  discussed  wages  on  the  assumption  that  all  men  had 
equal  natural  ability.  It  is  still  a  favorite  assumption  of 
radical  social  reformers  that  the  natural  ability  of  all  men  is 


Ch.  16]    HUMAN  BEINGS— THEIR  ECONOMIC  SERVICES  183 

equal,  and  that  all  the  differences  in  success  result  from  polit- 
ical injustice.  The  study  of  biology  of  late  has  made  patent 
the  unending  differences  that  prevail  throughout  the  animate 
world.  No  two  members  of  the  same  family  or  species  are  just 
alike;  no  two  pigeons  have  wings  of  just  the  same  length. 
Nature  by  numberless  devices  is  experimenting  constantly 
with  variations  on  either  side  of  the  established  mean.  The 
accepted  fact  of  biologic  evolution  rests  on  the  foundation  of 
inequality,  in  structure  and  powers,  selected,  adapted  and 
transmitted  by  heredity.  In  all  life  there  is  inequalitj^  and 
the  whole  drama  of  human  history  as  well  as  that  of  biologic 
evolution  must  be  meaningless  or  illusory  to  one  who  does  not 
see  this  truth.  Accustomed  now  to  this  point  of  view,  we  as 
inevitably  think  of  the  natural  inequalities  in  men  as  did 
Adam  Smith  of  their  equality.  Inequality  of  talents  is  a  con- 
tinuing fact.  Men  in  all  their  qualities  of  mind  and  body  dis- 
play this  kaleidoscopic  variety. 

This  does  not  mean  that  industrial  inequality  as  it  exists 
to-day,  the  great  disparity  of  incomes,  correctly  or  justly 
reflects  the  degree  of  difference  in  men's  qualities,  either 
native  or  acquired.  It  does  not  follow  that  a  thousand-dollar 
income  represents  ten  times  the  ability  of  a  hundred-dollar 
one — far  from  it.  But  to  those  who  ignore  the  inequality  of 
men,  the  whole  problem  of  industrial  remuneration  must 
remain  a  mystery.  The  differences  in  human  capacity,  in 
respect  to  the  rendering  of  services  of  value,  is  one  of  the  fun- 
damental factors  entering  into  the  determination  of  labor- 
incomes. 


CHAPTER  17 
CONDITIONS  FOE  EFFICIENT  LABOR 

§  1.  Subjective  and  objective  factors  of  efficiency.  §  2.  Food  and 
efficiency.  §  3.  Clothing  and  housing.  §  4.  Schooling.  §  5.  Political 
security  and  honest  government.  §  6.  Effect  of  caste  upon  efficiency. 
§  7.  American  democracy  and  efficiency.  §  8.  Balance  of  advantage  be- 
tween work  and  leisure.  §  9.  Division  of  labor  and  exchange.  §  10. 
Individual  and  territorial  division.  §  11.  Advantages  of  specialization. 
1 12.  Best  adjustment  of  talents  and  occupations. 

§  1.  Subjective  and  objective  factors  of  eflficiency.  The 
efficiency  of  labor,  in  its  broadest  sense,  is  its  ability  to  render 
services  or  produce  things  that  minister  to  welfare.  It  is  a 
resultant  of  many  influences.  In  its  broader  sense,  the 
phrase  "efficiency  of  labor"  implies  any  and  every  influence 
that  makes  for  a  larger  and  better  supply  of  goods.  In  part 
it  depends  on  the  physical  and  mental  powers  of  men,  in  part 
on  things  outside  of  the  worker  that  either  stimulate  and 
strengthen  him,  or  give  him  more  favorable  conditions  in 
which  to  work.  These  are  respectively  the  subjective  and  the 
objective  aspects  of  efficiency.  Many  of  the  objective  condi- 
tions count  in  the  result  only  as  they  affect  the  men,  benefit- 
ing their  health  and  strength,  stimulating  their  ambitions, 
promoting  education,  invention,  thrift,  etc.  It  is  this  class  of 
forces,  acting  in  and  through  men,  of  which  we  are  now  to 
speak.  We  leave  aside  for  the  time  one  of  the  largest  objec- 
tive aspects  of  the  question,  that  of  the  material  equipment 
with  which  the  community  as  a  whole  is  furnished,  relative 
to  the  population.  According  as  this  equipment  is  more  or 
less  abundant,  as  labor  is  employed  in  a  fertile  or  a  barren 

184 


Ch.  17]  CONDITIONS  FOR  EFFICIENT  LABOR  185 

field,  with  a  sharp  tool  or  a  dull  one,  with  a  highly  developed 
machine  or  a  poor  one,  the  product  is  more  or  less.^ 

We  limit  our  attention  here  to  the  conditions  of  efficiency 
midway  between  the  qualities  and  abilities  of  men  (primarily 
subjective)  and  the  natural  equipment  (primarily  objective). 
Among  a  population  of  a  given  grade  of  intelligence  and  a 
given  economic  environment  of  natural  resources,  what 
causes  will  operate  to  make  the  laborers  vary  in  their  effi- 
ciency ? 

§  2.  Food  and  efficiency.  Usually  workmen  that  are  get- 
ting good  wages  enjoy  abundant  food  and  creature  comforts; 
poorly  paid  workers  go  scantily  fed.  The  question  arises: 
which  is  cause,  which  effect  ?  Some  maintain  that  all  that  is 
needed  to  make  workmen  more  efficient  is  to  feed  them  well. 
In  some  cases  this  is  probably  true.  The  Porto  Rieans  en- 
listed in  the  American  regular  army  are  reported  to  have 
increased  at  once  in  strength,  weight,  and  vigor ;  the  Filipino 
recruits,  thanks  to  the  American  army  rations,  soon  outgrew 
their  uniforms.  Some  employers  in  Europe  pay  their  work- 
men an  extra  sum  on  condition  that  it  is  spent  for  meat.  But 
if  wages  increase,  it  is  by  no  means  certain  that  more  or  better 
food  will  be  bought;  or,  if  it  is,  that  the  workmen's  powers 
will  be  increased.  There  is  a  limit  to  the  gain  in  efficiency 
by  increasing  food.  There  is  some  reason  to  believe  that  in 
America  great  numbers  of  our  people,  perhaps  even  many 
manual  laborers,  would  be  better  off  if  they  bought  simpler 
and  less  costly  food.  The  maximum  of  health  and  vigor  may 
be  attained  with  moderate  outlay,  and  beyond  that  point 
richer  food  doubtless  does  more  harm  than  good.  Poor  judg- 
ment in  the  selection  of  food  is  shown  in  many  families,  and 
there  is  little  appreciation  of  its  influence  on  health. 

At  one  time  an  experiment  in  feeding  pigs  was  tried  on  the 
Cornell  farm.    Four  groups  of  six  pigs  each  were  kept  in  four 

1  Some  part  of  this  subject  has  been  already  touched  in  discussing 
wealth  and  its  uses,  and  the  other  parts  will  be  more  fully  treated 
in  Part  VI  with  population,  diminishing  returns,  and  machinery. 


IM  VALUABLE  HUMAN  SERVICES,  AND  WAGES      [Px.  Ill 

different  pens  and  fed  four  different  rations.  Tho  alike 
in  breed  and  age,  the  groups  began  at  once  to  differ  in  dis- 
position. One  group  squealed  more ;  another  scratched  more ; 
another  waxed  fat  faster.  Every  week  they  were  weighed, 
and  finally  were  butchered,  hung  up,  and  photographed.  At 
that  same  time,  at  the  Elmira  Eeformatory  some  experiments 
were  being  tried  on  some  criminals  of  the  lower  class.  They 
were  given  daily  baths,  special  physical  exercises,  and  were 
fed  on  a  specially  bountiful  diet.  Scientific  philanthropy 
stopped  there,  but  photographs  "before  and  after,"  repro- 
duced in  the  printed  reports,  show  the  great  physical  improve- 
ment that  resulted,  and  a  marked  change  occurred  likewise  in 
disposition  and  intelligence.  Many  laboratory  experiments 
have  been  made  of  late  to  test  the  chemical  nature  and  the 
physiological  effects  of  foods.  It  is  becoming  more  fully 
recognized  that  the  quality  and  quantity  of  food,  and  the 
cooking  of  it,  have  a  great  influence  on  the  economic  quality 
of  the  worker. 

§  3.  Clothing  and  housing.  Variation  in  quality  and 
amount  of  clothing,  while  of  course  varying  with  the  climate, 
is  on  the  whole  of  less  practical  effect  upon  efficiency  than 
that  of  food.  Loss  of  heat  and  energy,  dulling  the  powers, 
stiffening  the  muscles,  causing  illness  with  many  trains  of 
evils,  make  ill-clad  workmen  inefficient.  The  cost  of  clothing 
enough  for  comfort  is,  however,  comparatively  small,  the 
amount  spent  for  ornament  is  comparatively  high.  A  man 
spends  about  one  third  of  each  day  in  sleep  and  his  physical 
and  mental  powers  and  efficiency  in  his  hours  of  work  depend 
in  large  measure  on  the  conditions  making  for  restful  sleep, 
on  the  comfort,  decency,  light,  ventilation,  and  sanitary  sur- 
roundings in  the  home.  Nearly  another  third  of  each  worker 's 
life  (about  half  his  waking  hours)  is  spent  in  his  house  or  in 
its  neighborhood,  where  the  sights,  sounds,  and  physical  con- 
ditions of  streets,  alleys,  and  places  of  amusement  are  con- 
stantly helping  to  determine  his  fitness  for  industrial  tasks. 
Even  more  important  are  these  conditions  of  the  house  and 


Ch.  17]  CONDITIONS  FOR  EFFICIENT  LABOR  187 

surroundings,  good  air,  water,  playgrounds  for  growing  chil- 
dren, to  enable  a  population  to  continue  and  renew  itself  with 
healthy  and  efficient  workers.  Many  of  these  conditions  are 
free  goods  in  the  country,  and  the  simplest  cottage  in  an  open 
field  makes  them  possible.  They  become  more  difficult  to 
secure  as  manufacturing  and  densely  populated  commercial 
districts  grow.  People  come  to  live  in  unnatural  conditions, 
and  evils  of  slums  and  bad  housing  appear. 

Another  third  of  the  worker 's  life  is  spent  in  his  work-place, 
whether  it  be  in  the  dwelling  or  in  the  field,  street,  store,  or 
factory.  Astonishingly  little  thought  has  been  given,  even  by 
men  working  for  themselves,  to  the  effect  that  the  work-place 
may  have  on  the  worker's  efficiency.  Many  employers,  how- 
ever, have  come  to  see  that  it  does  not  pay  to  have  bad  factory 
conditions.  Even  if  the  ultimate  effects  in  causing  sickness 
and  shortening  the  worker 's  life  be  ignored,  the  bad  immediate 
effect  to  the  employer  is  a  reduction  in  the  efficiency  of  the 
worker.  A  slight  change  in  the  weather  affects  the  working  of 
even  a  gasoline  engine.  Is  not  a  worker  as  sensitive  to  condi- 
tion of  physical  comfort  and  health  ?  Any  piece  of  machinery 
requires  to  be  installed,  maintained,  and  adjusted  just  right 
or  it  will  fall  short  of  its  full  capacity  and  wear  out  more 
quickly.  It  is  so  with  a  man.  The  best  factories  are  now 
being  planned  as  carefully  as  is  the  machinery,  with  a  view 
to  having  excellent  conditions  of  light,  heat,  ventilation,  clean- 
liness, and  comfort  of  the  employees.  Doubtless  much  larger 
and  fuller  provision  of  this  kind  would  be  to  the  advantage  of 
employers,  as  well  as  for  the  welfare  of  the  workers  and  of 
society  in  general. 

§  4.  Schooling.  Education  in  schools  is  a  most  imperfect 
index  of  training  for  industrial  tasks.  A  large  part  of  the 
purpose  even  of  the  elementary  schooling  is  to  fit  for  citizen- 
ship and  for  the  receipt  of  the  large  psychic  income  possible 
through  reading  and  the  understanding  of  life  about  one. 
But  one  without  reading,  writing,  and  other  elementary  school 
subjects  is  in  these  days  unfitted  to  take  part  in  all  but  the 


188  VALUABLE  HUMAN  SERVICES,  AND  WAGES       [Pt  III 

simplest  tasks.    The  percentage  of  illiteracy  in  the  United 
States,  tho  still  considerable,  is  steadily  declining. 

Population  in  the  United  States,  10  years  of  age  and  over. 


Percentage  of  Illiterates 

Average  years 

Total  population     Whites 

Negroes 

of  schooling 

1880  .. 

17                        9 

70 

4 

1890  .. 

13                        8 

67 

4.5 

1900  .. 

11                        6 

45 

5.2 

1910  .. 

8                        6 

30 

5.9 

The  decline  in  illiteracy  accompanies  a  regular  increase  in 
the  average  period  spent  by  the  youth  in  school,  which  has 
risen  from  3.4  years  in  1870,  and  4  years  in  1880,  to  5.9 
years  in  1910.  Still  a  very  large  number  of  children  drop  out 
of  school  very  early  as  is  indicated  by  these  figures. 

Proportion  of  age  groups  attending  school 

Ages  Per  cent  attending 

10-14  years    96 

15-17  years   66 

18-20  years   17 

21    5 

Many  of  those  that  remain  get  no  farther  than  the  fourth 
grade.  An  average  result,  as  follows,  is  indicated  by  the 
statistics :  of  the  children  entering  the  first  grade. 

About  90  per  cent  attained  the  fourth  grade. 
About  66  per  cent  attained  the  sixth  grade. 
About  50  per  cent  attained  the  eighth  grade. 
About  25  per  cent  entered  High  School. 
About  10  per  cent  graduated  from  High  School. 
About    5  per  cent  entered  a  college,  normal,  technical  or 
professional  school. 

§  5.  Political  security  and  honest  government.  If  men 
are  to  labor  in  the  present  and  for  the  future,  they  must  enjoy 
the  protection  of  a  stable  and  strong  government.  As  the 
framers  of  the  Constitution  expressed  it,  the  function  of  gov- 
ernment is  to  insure  domestic  tranquillity,  provide  for  the 
common  defense,  and  insure  the  blessings  of  liberty  to  the 
citizen.  Directness  and  certainty  of  reward  are  more  essential 
than  mere  size  of  reward  in  insuring  action  and  effort.     There 


Ch.  17] 


CONDITIONS  FOR  EFFICIENT  LABOR 


189 


~rT7~5rrmTrTT"Tm 

29.     Pupils     in      School, 
Grades,    1912.* 


must  be  a  close  relation  be- 
tween work  and  the  fruits  *" 
of  work.  Political  insecurity 
weakens  this  relation  and 
makes  the  reward  dependent 
on  the  chance  of  escaping  the 
highwayman  and  the  foreign 
invader.  For  fear  of  this, 
many  a  nation  has  sacrificed 
some  of  the  precious  elements 
of  liberty,  and  has  submitted  ^^"• 
to  a  strong  despot.  This  was 
the  economic  motive  in  the  feudal  system. 

The  prevalence  of  standards  of  honesty  in  private  and  pub- 
lic business  is  a  condition  for  high  industrial  efficiency.  Cor- 
ruption in  government  has  the  same  effect  as  political  inse- 
curity; in  fact,  it  is  but  another  form  of  it.  We  are  accus- 
tomed to  the  thought  that  in  an  Asiatic  despotism  a  worker 
beginning  a  task  is  uncertain  whether  he  will  reap  the  reward, 
as  public  officials  may  at  any  moment  seize  upon  the  fruits 
of  his  labor.  But  in  our  own  country  similar  evils  are  not 
entirely  lacking.  Assessments  often  are  unfair,  and  justice 
sometimes  is  bought.  Men  in  high  executive  positions  are 
able  to  make  or  mar  the  fortunes  of  their  followers.  Some- 
times a  legislator  from  a  country  town  goes  to  the  state  capital 
poor  and  returns  rich.  The  spoils  system  in  politics  is  costly 
to  the  community,  not  merely  because  a  few  men  successful 
in  gaining  office  get  paid  several  times  as  much  as  they  are 
worth;  it  is  an  economic  evil  because  it  tempts  many  other 
men  to  give  up  steady  work.     Such  examples  break  down  the 

*  The  diagram  represents  4,367,000  children  in  the  first  grade.  A 
very  large  number  (more  than  two  out  of  three)  stay  there  more  than 
a  year,  repeating  the  work.  A  few  never  get  beyond  this  point,  but  all 
excepting  about  a  tenth  attain  the  fourth  grade,  tho  some  take  seven 
or  eight  years  to  do  it.  Then  each  year  several  hundred  thousands  drop 
out.  ilore  than  one-half  of  those  in  the  eighth  grade  do  not  enter  a  high 
school   (or  its  equivalent). 


190  VALUABLE  HUMAN  SERVICES,  AND  WAGES       [Pt.  Ill 

motives  leading  to  careful  preparation  for  regular  industry. 
They  breed  the  notion  that  wealth  is  more  dependent  •  on 
chance  or  jobbery  than  on  efficient  service.  Dishonesty  in 
private  business  means  the  use  of  energy  not  to  produce 
wealth,  not  to  add  to  the  sum  for  all  to  enjoy,  but  to  get  it  from 
some  one  else.  Public  corruption  and  commercial  dishonesty 
alike  entail  upon  the  industrious  both  immediate  loss  and  the 
far  greater  cost  of  weakened  character,  relaxed  energy,  and 
decreased  efficiency  of  labor. 

§  6.  Effect  of  caste  upon  efficiency.  It  may  be  said  gener- 
ally that  customs  and  social  ideals  that  raise  or  depress  hope 
and  ambition,  affect  efficiency.  The  institution  called  caste, 
which  fixes  the  place  of  the  worker  and  makes  it  impossible  to 
rise  out  of  the  social  position  in  which  he  is  born,  and  dis- 
graceful to  do  any  work  reserved  to  other  castes,  is  depressing 
to  energy.  It  exists  in  some  form  throughout  the  world,  and 
where  it  is  not  called  by  that  name,  the  same  caste  spirit  is 
at  work.  The  European  peasants  in  the  Middle  Ages  lived 
under  the  shadow  of  it.  Where  slavery  exists  the  master  class 
at  times  feels  its  hardships.  "It  is  not  so  hard  to  live, ' '  says 
the  hungry  Creole  daughter  in  "The  Grandissimes, "  "but  it 
is  hard  to  be  ladies.  .  .  .  "We  are  compelled  not  to  make  a  liv- 
ing. Look  at  me :  I  can  cook,  but  I  must  not  cook ;  I  am  skil- 
ful with  the  needle,  but  I  must  not  take  in  sewing;  I  could 
keep  accounts ;  I  could  nurse  the  sick ;  but  I  must  not. ' '  No- 
where in  the  world  is  there  less  caste  than  in  America,  but  it 
is  here.  The  negro's  low  measure  of  industrial  efficiency  is 
partly  the  cause  of  so-called  race  feeling  against  him,  but  in 
the  case  of  the  more  capable  individuals  it  may  be  partly  the 
effect  of  that  feeling.  To  close  to  a  capable  worker  all 
but  the  menial  occupations  is  to  weaken  his  motives  for 
effort. 

§  7.  American  democracy  and  efficiency.  Democracy  has 
made  for  the  efficiency  of  American  industry  much  as  have 
the  great  natural  resources.  America's  rapid  advance  in  in- 
dustrial lines  has  been  favored  by  her  ideas  and  institutions. 


Ch.  17]  CONDITIONS  FOR  EFFICIENT  LABOR  191 

The  many  rewards  open  to  personal  merit  and  the  chance 
for  every  worker  to  improve  his  position,  have  helped  to 
stimulate  here  to  greater  energy  and  to  a  faster  working  pace 
in  most  grades  of  lahor  than  is  found  elsewhere  in  the  world. 
There  is  danger  that  under  the  new  conditions  of  population 
and  industry  something  of  the  spirit  of  enterprise  will  be 
lost.  To  Western  eyes  already  the  young  men  in  the  older 
East  seem  to  be  trammeled  by  social  conventions.  In  an  older 
community  there  is  less  of  hopeful  ambition;  one's  position 
depends  more  on  what  his  fathers  achieved;  in  the  new  com- 
munity, more  on  what  he  does  himself.  If  it  is  true,  as  wise 
students  declare,  that  the  frontier  has  been  the  nursery  of  our 
democratic  ideas,  we  may  well  ask  what  effect  the  closing  of 
the  frontier  will  have  on  our  national  sentiment  and  on  our 
material  prosperity. 

§  8,  Balance  of  advantage  between  work  and  leisure. 
Custom  and  national  temperament  affect  the  efficiency  of  labor 
by  determining  the  normal  period  of  labor-time.  After  the 
bare  necessities  of  life  are  provided  for,  the  worker  has  a 
wide  or  narrow  margin  of  productive  energy  to  use  as  he 
pleases.  If  four  hours'  work  a  day  would  enable  him  to  live, 
will  he  work  longer  or  will  he  stop?  The  answer  is  deter- 
mined by  the  balance  between  the  value  of  leisure  and  the 
value  of  labor's  product.  Is  the  lure  of  the  fruits  of  addi- 
tional hours  of  labor  stronger  than  the  desire  for  idleness? 
Does  the  pain  of  toil  repel  more  than  its  fruits  attract  ?  In- 
dividual differences  are  plainly  expressed  when  each  man 
labors  on  his  own  field.  The  prudent  man,  in  the  old  maxims, 
makes  hay  while  the  sun  shines  and  plows  deep  while  sluggards 
iLeep.  National  and  religious  holidays  in  some  countries  make 
an  enormous  loss  of  time  from  industry  a  patriotic  and  pious 
duty.  The  use  made  of  spare  time  differs  according  to  cli- 
mate, race,  and  temperament.  In  the  tropics  the  margin  is 
converted  usually  into  loafing,  in  the  temperate  zones  largely 
into  objective  forms  of  enjoyment.  In  the  modern  large  or- 
ganization of  industry,  working  hours  are  much  the  same  for 


192  VALUABLE  HUMAN  SERVICES,  AND  WAGES      [Pt.  in 

all  workers  in  the  establishment.  Individual  preferences  are 
still  expressed,  however,  in  irregularity  of  employment.  In 
the  South  some  manufacturers  have  found  that  on  an  average 
the  negroes  .vill  work  in  a  factory  not  more  than  five  or  six 
hours  a  day,  perhaps  working  ten  hours  for  four  days  and 
staying  away  two  days  a  week.  Such  limited  working  hours 
mark  a  primitive  standard  of  desires  and  primitive  industrial 
qualities,  altho  a  shortening  of  the  long  working  day  of 
ten  or  twelve  hours,  as  incomes  increase  above  bare  subsist- 
ence, is  in  accord  with  a  rational  valuation  of  leisure.  A 
moderate  change  in  that  direction  can  not  but  increase  rather 
than  diminish  the  efficiency  of  labor. 

§  9.  Division  of  labor  and  exchange.  The  term  "division 
of  labor"  is  simple,  but  the  thought  is  a  complex  one.  Its 
full  discussion  would  cover  the  whole  field  of  political 
economy,  but  only  its  most  essential  aspects  can  here  be 
touched  upon.  Division  of  labor  is  a  term  expressing  that 
complex  arrangement  of  industrial  society  whereby  individual 
workers  are  enabled  to  apply  themselves  to  the  production  of 
certain  kinds  of  goods,  securing  others  by  trade.  Division  of 
labor  and  exchange  are  counterparts  and  mutually  determine 
each  other.  On  Robinson  Crusoe's  island  there  could  be  no 
division  of  labor.  Division  of  labor  depends  on  the  extent  of 
the  market,  and  in  turn  widens  its  limits.  The  number  of 
articles  that  any  one  would  care  to  produce  at  one  time  and 
place  depends  on  the  opportunity  to  exchange  them.  Those 
two  aspects  of  industry  thus  are  inseparable  in  thought  and 
practice.  The  worker  finds  division  of  labor  existing  as  a 
social  institution  and,  according  as  he  adapts  himself  to  it 
wisely  or  foolishly,  it  increases  more  or  less  his  efficiency. 
Division  of  labor  necessitates  variety  of  regular  occupations, 
and  the  practice  of  special  trades  and  professions.  Speciali- 
zation is  the  individual  aspect  of  division  of  labor.  It  is 
doing  one  comparatively  limited  kind  of  task  with  the  purpose 
of  becoming  more  expert  in  it.  The  term  division  of  labor, 
however,  suggests  more  broadly  the  situation  where  two  or 


Ch,  17]  CONDITIONS  FOR  EFFICIENT  LABOR  193 

more  persons  are  specializing  and  are  trading  directly  or  in- 
directly with  each  other. 

§  10.  Individual  and  territorial  division.  Division  of 
labor  may  be  between  individuals  in  the  same  community  or 
between  those  in  different  territories  and  nations.  In  divi- 
sion of  labor  between  occupations,  each  worker  applies  him- 
self to  the  production  of  some  product  or  group  of  products 
and  secures  other  goods  by  trade.  When  a  number  of  workers 
in  a  locality  engage  in  the  fabrication  of  one  kind  of  prod- 
uct to  trade  with  persons  in  another  community,  it  is  terri- 
torial division  of  labor.  This  trade  may  be  between  persons 
living  in  different  localities  in  the  same  country  (called  local- 
ization of  industry)  or  between  the  citizens  of  two  nations,  in 
foreign  trade.  Division  of  labor  usually  begins  in  some  nat- 
ural differences,  of  soil,  climate,  mineral  and  forest  resources, 
or  water-power  (see  Chapter  6,  section  11,  on  origin  of  mar- 
kets) .  Whatever  its  origin  it  leads  to  individual  specialization 
which  becomes  fixed  by  habit  and  training.  To  the  original  nat- 
ural advantage  are  thus  added  the  advantages  of  a  larger  and 
regular  labor-supply,  of  nearness  to  related  and  tributary  in- 
dustries, and  of  the  greater  chance  to  use  waste  products,  and 
frequently  the  economics  of  large-scale  production  (see  below. 
Chapter  31).  The  natural  advantages  in  another  district 
must  be  large  to  enable.it  to  start  successfully  against  these 
acquired  economies,  and  territorial  division  of  labor  thus  tends 
to  continue  for  long  periods  when  once  established. 

§  11.  Advantages  of  specialization.  There  is  a  tradition 
that  an  ingenious  lecturer  in  one  of  our  universities  was  ac- 
customed to  give  to  his  class  eighty  reasons  why  division  of 
labor  was  of  advantage.  It  is  none  too  many,  as  every  reason 
for  the  modern,  as  contrasted  with  the  primitive,  organization 
of  industry  should  be  included.  Apart  from  natural  differ- 
ences in  localities,  most  of  these  relate  to  specialization. 
Specialization  increases  efficiency  by:  (a)  saving  time;  (b) 
saving  tools  and  materials;  (c)  improving  quality;  (d)  in- 
creasing skill;  (e)  increasing  knowledge;  (f)  stimulating  in- 


194  VALUABLE  HUMAN  SERVICES,  AND  WAGES       [Pt.  Ill 

vention;  (g)  encouraging  enterprise;  (h)  economizing  talent. 
The  headings  just  given  may  serve  to  suggest  the  leading 
phases  of  this  subject. 

(a)  Specialization  saves  time  by  making  unnecessary  the 
physical  change  of  place  for  the  vk^orker,  the  frequent  shifting 
of  tools,  and  the  mental  readjustment  required  for  the  under- 
taking of  a  new  task. 

(b)  Specialization  saves  tools,  for  either  each  kind  of  work 
must  be  most  ineffectively  done,  or  there  must  be  provided 
for  each  worker  a  complete  set  of  tools  which  thus  will  be  used 
rarely  and  will  rust  out  rather  than  wear  out.  If  a  few  tools 
are  thoroly  used,  they  yield  a  larger  income  and  require  less 
care  and  repairs  in  proportion  to  their  uses.  In  fact,  this 
fuller  economic  use  of  machinery  and  plant  where  a  large 
product  is  turned  out  at  one  place,  is  a  prime  factor  in  the 
advantages  of  large  production  (a  subject  to  be  treated  else- 
where, Chapter  31,  much  more  fully  than  is  here  possible). 

(c)  By  specialization  is  made  possible  a  quality  of  goods 
never  to  be  secured  by  the  less  skilled  efforts  of  the  Jack-of- 
all-trades. 

(d)  Specialization  develops  skill,  as  repetition  of  the  same 
task  trains  the  muscles,  forms  a  mental  habit,  and  gives  swift- 
ness and  deftness  of  touch. 

(e)  The  specialist  is  able  to  give  much  longer  time  to  educa- 
tion and  training  for  his  lifework,  and  he  continues  to  grow  in 
knowledge  of  his  materials  and  of  the  best  processes,  and  he 
gains  a  power  of  delicate  observation  and  facility  in  meeting 
new  difficulties  that  are  impossible  when  attention  is  divided 
among  a  number  of  tasks. 

(f)  By  dividing  and  simplifying  processes,  specialization 
stimulates  invention.  The  most  complex  machines  have  been 
developed  gradually  by  combinations  and  adaptations  of  sim- 
ple tools,  and  the  more  a  process  is  subdivided,  the  greater  is 
the  chance  of  hitting  upon  a  device  to  repeat  mechanically  the 
few  simple  movements. 

(g)  Specialization  increases  the  motives  of  emulation  and 


Ch.  17]  CONDITIONS  FOR  EFFICIENT  LABOR  195 

enterprise,  by  making  it  possible  for  each,  man  to  see  better 
what  is  needed  and  to  make  a  more  exact  comparison  of 
results. 

(h)  It  economizes  talent  by  giving  to  each  the  highest  task 
of  which  he  is  capable,  while  fitting  the  less  eflScient  workers 
into  the  minor  places  made  possible  by  subdivision.  In  an 
American  wagon-factory,  a  one-armed  man  operating  a  ma- 
chine was  able  to  turn  out  as  large  a  product  and  earn  as  high 
wages  as  any  other  employee.  The  same  advantages  of  spe- 
cialization are  found  with  modifying  conditions  in  educational 
and  professional  lines.  The  marvelous  progress  of  science  in 
recent  years  has  been  made  possible  by  each  student  and  in- 
vestigator doing  a  few  things  and  doing  them  well. 

§  12.  Best  adjustment  of  talents  and  occupations.  Most 
young  people  give  slight  reflection  to  the  choice  of  an  occupa- 
tion. The  world  is  filled  with  industrial  misfits,  "round  men 
in  square  holes,"  good  carpenters  spoiled  to  make  poor  doc- 
tors. The  individual  worker,  to  attain  his  highest  economic 
efficiency,  must  select  from  the  occupations  made  possible  by 
division  of  labor  the  one  for  which  his  talents  are  best  fitted. 
It  so  often  happens  that  the  natural  aptitude  of  the  youth  is 
the  thing  last  or,  in  any  event,  least  considered.  Unreasoning 
imitation,  family  traditions,  parental  wishes,  class  pride,  social 
prejudice,  childish  whim,  are  often  decisive  of  the  life  career. 
Some  occupations  have  so  few  chances  of  advancement  that 
they  are  called  the  ' '  blind  alley  trades, ' '  yet  to  start  in  them  is 
so  easy  that  they  attract  the  unthinking  youth,  especially  those 
with  impoverished  parents.  Happily  in  some  cases,  before 
too  late,  the  man  "finds  himself,"  but  too  often  the  poverty 
of  the  family  and  the  obstacles  to  education  preclude  the  exer- 
cise of  intelligent  choice. 

Since  the  beginning  of  the  centurj''  some  serious  efforts 
have  been  made  to  meet  this  difficulty  by  what  is  called  voca- 
tional guidance.  In  some  of  the  German  schools  in  recent 
years  the  children's  aptitudes  have  been  carefully  studied,  and 
definite  advice  has  been  given.    Bureaus  of  vocational  guid- 


196  VALUABLE  HUMAN  SERVICES,  AND  WAGES       [Pt.  HI 

ance  are  maintained  now  in  some  American  cities.  With  more 
careful  studies  of  the  strength,  health,  qualities  of  sight,  hear- 
ing, touch,  natural  aptitudes  and  tastes,  one  of  the  greatest  of 
social  and  economic  services  will  be  in  this  way  performed. 

It  is  of  importance  to  society  as  well  as  to  the  individual 
that  talent  should  be  discovered  in  time,  that  tasks  should  be 
fitted  to  aptitudes,  that  each  member  of  society  should  attain 
to  his  highest  efficiency.  The  approach  to  this  ideal — made 
possible  by  popular  education,  the  decline  of  caste,  the  spread 
of  genuine  democracy,  the  progress  of  social  justice — will  in- 
crease not  only  the  workers'  efficiency,  but  society's  abiding 
welfare. 


CHAPTER  18 

THE  VALUE  OF  LABOR  AND  THE  CHOICE  OF 
OCCUPATIONS 

§  1.  Services  of  labor  comparable  with  uses  of  wealth.  §  2.  Limita- 
tions of  the  labor-supply.  §  3.  The  direction  of  labor  guided  by  the 
value  of  its  results.  §  4.  Value  of  labor  to  the  isolated  laborer.  §  5. 
Rewards  and  sacrifices  incident  to  occupations.  §  6.  Psychic  factors  in 
labor-incomes.  §  7.  Costs  and  deductions  from  nominal  labor-incomes. 
§  S,  The  long-time  and  ultimate  rewards  of  labor.  §  9.  Rarity  of  abil- 
ity limiting  choice  of  occupations.  §  10.  Imputation  of  value  to  labor 
and  to  uses  of  wealth. 

§  1.  Services  of  labor  comparable  with  uses  of  wealth. 
In  the  last  two  chapters  we  have  sought  to  suggest  in  some 
measure  the  variety  of  human  talents  and  the  various  con- 
ditions under  which  human  labor  is  exerted  for  economic  pur- 
poses. The  aim  of  this  and  the  succeeding  chapter  is  to  make 
clear  the  manner  in  which  the  various  kinds  of  labor  are  evalu- 
ated (the  value-problem),  and  how  they  are  sold  in  the  mar- 
ket (the  price-problem  of  wages).  Fortunately,  we  have 
already,  in  the  theories  of  usance  and  of  rent,  all  that  is 
essential  and  fundamental  to  theories  of  labor-value  and  of 
wages.  Man's  services  and  wealth's  uses  move  in  parallel 
lines  and  are  of  parallel  nature  in  contributing  to  the  securing 
of  income.  Human  actions  directed  toward  some  desired  end 
constitute  a  usance  of  human  beings ;  they  are  valuable  serv- 
ices just  as  the  work  of  domestic  animals,  the  uses  of  tools, 
and  the  motions  of  machinery  are  valuable  uses  of  wealth. 
These  valuable  services,  partly  rendered  directly  to  persons 
and  partly  embodied  in  goods,  constitute  labor-incomes,  com- 
parable to  the  usance  of  wealth,  the  wealth-incomes.  (See 
also    Chapter   19,   section   12.)     The   free   laborer   sells  his 

197 


198  VALUABLE  HUMAN  SERVICES,  AND  WAGES       [Pt.  Ill 

services  (separable  uses)  just  as  the  owner  of  a  more 
or  less  durative  agent  sells  its  usance,  without  selling 
the  use-hearer.  Our  task,  therefore,  now  is  not  to  form- 
ulate a  theory  essentially  different  from  the  general  theory 
of  value  and  of  price,  but  merely  to  show  how  labor  exemplifies 
the  general  principles  of  value  and  of  price,  and  particularly 
those  of  usance  and  rent,  already  set  forth;  noting  any  cir- 
cumstances surrounding  the  process  that  are  somewhat  pe- 
culiar to  the  case  of  labor. 

We  know  that  value  is  the  expression  of  a  certain  choice 
among  goods,  and  price  expresses  a  ratio  of  exchange  that  is 
arrived  at  among  a  number  of  buyers  and  sellers  whose  choices 
embody  demand  and  supply.  Let  us  look  first  at  the  more 
subjective  aspects  of  the  problem;  that  is,  the  value  which 
labor  as  an  agent  for  gratifying  desires  has  to  the  human 
being  who  possesses  the  labor-power. 

§  2.  Limitations  of  the  labor-supply.  The  fundamental 
condition  of  all  valuation  is  limitation  of  supply  relative  to 
the  desires ;  so  it  is  in  the  case  of  the  valuation  of  labor.  "We 
have  no  difficulty  in  recognizing  that  some  qualities  of  labor 
are  scarce.  There  are  some  acts  that  are  more  difficult  than 
others  and  some  which  few  men  can  perform  at  all.  IVIost 
women  will  confess  that  they  cannot  warble  as  Patti  could, 
most  men  will  admit  that  they  have  not  the  mercantile  ability 
of  John  Wanamaker.  There  are  not  enough  great  surgeons 
with  magic  deftness  of  hand.  There  are  not  enough  great 
medical  specialists,  men  of  marvelous  insight,  who  do  not 
guess  and  blunder,  whose  diagnosis  is  swift  and  sure.  The 
man  of  mediocre  capacity  recognizes  even  through  the  fog  of 
his  self-esteem  that  there  is  a  reason  for  the  high  value  of  rare 
services  such  as  these.  The  proverb,  ''There  's  always  room 
at  the  top,"  is  both  a  cheering  and  a  pathetic  truth.  In  every 
branch  of  human  effort  there  is  a  never-ending  lack  of  that 
higher  qualification  and  training  required  for  the  best  results. 

But  it  is  not  so  easy  to  see  that  the  commonest  services  have 
value  only  because,  at  any  particular  time  and  place,  they  are 


Ch.  18]  THE  VALUE  OF  LABOR  199 

scarce.  Compared  with  the  possible  desires  there  are  many- 
things  to  be  done  if  there  were  to  be  had  at  a  low  enough  cost 
(or  price)  labor  sufficient  to  do  them.  It  is,  alas,  true  that 
there  may  be  a  temporary  maladjustment  of  industry,  when 
either  in  a  particular  factory,  or  in  a  particular  locality,  or 
more  generally  at  a  time  of  industrial  depression,  there  is  a 
superfluity  of  human  labor.  This  is  the  acute  problem  of 
unemployment.  There  is  at  all  times  a  superfluity  of  human 
agents  of  certain  kinds.  Children  are  often  eager  to  help,  and 
grieve  when  they  are  told  that  they  are  "more  bother  than 
they  are  worth."  Many  of  the  ignorant,  the  insane,  the 
feeble-minded,  the  vicious,  drunken,  and  debauched,  number- 
ing unhappily  many  millions,  can  give  to  the  world  only  nega- 
tive uses,  more  properly  called  disservices.  This  is  the 
chronic  problem  of  the  unemployable.  But  services  of  normal 
men  are  nearly  always  in  demand,  and  the  higher  services  are 
so  rare  that  they  are  in  great  demand;  except  for  temporary 
maladjustments  in  industry  in  our  complex  exchanging 
economy,  labor  of  every  kind  is  scarce,  relative  to  the  objects 
of  desire  which  it  might  aid  in  procuring.  Man's  desires 
have  no  bounds,  his  powers  are  limited.  No  community  has 
regularly  at  its  command  an  absolute  surplus  of  labor  services 
(tho  there  are  temporary  maladjustments).^  Either  through 
lack  of  ability  or  lack  of  skill  and  endurance  and  willingness 
to  work,  the  people  in  a  community  altogether  are  unable  to 
do  enough  work  to  satiate  all  the  desires  to  which  labor  could 
minister.-  Men's  strength  and  endurance  fail  after  a  few 
hours  of  exertion,  and  the  desire  to  rest  overcomes,  at  the 
end  of  each  day's  labor,  the  desire  for  other  goods  which  con- 
tinuance of  labor  could  secure.  If  labor  were  available  in 
unlimited  amounts,  it  would  afford  an  unlimited  supply  of 

1  However,  it  may  easily  happen  that  the  laborers  may  be  so  numer- 
ous, relative  to  other  resources,  that  the  value  of  labor  is  lower  than 
it  might  otherwise  be,  or  than  is  consistent  with  general  well-being. 
See  on  population,  Part  VI. 

2  See  ch.  36,  sec.  3  on  "the  lump  of  labor"  notion. 


200  VALUABLE  HUMAN  SERVICES,  AND  WAGES      [Pt.  Ill 

ultimate  services  (so  far  as  they  are  dependent  on  labor)  and 
the  value  of  these  services  would  sink  to  zero.  Some  existing 
limitation  of  labor,  therefore,  is  essential  to  its  value. 

§  3.  The  direction  of  labor  guided  by  the  value  of  its 
results.  The  labor  available  at  any  time  and  place  can  be 
turned  to  securing,  improving,  and  multiplying  the  amount  of 
any  one,  or  of  many  different  kinds  of  goods,  or  it  may  be 
distributed  among  them  in  any  chosen  proportion.  Thus  in 
a  very  real  sense  labor  is  a  potential  supply  of  goods.  Within 
the  limits  set  by  materials  to  work  upon  and  by  the  indirect 
agents  to  work  with,  the  direction  of  the  labor  of  one  period 
determines  the  kinds  and  amounts  of  the  goods  of  the  next 
period — moment,  month,  or  year.  A  savage  tribe  finds  game 
plentiful  and  kills  it ;  then  turns  to  dressing  skins  to  making 
canoes  or  gathering  and  making  flint  arrow-heads.  At  a  time 
of  famine  the  whole  tribe  gives  all  its  energies  to  the  search 
for  food.  In  civilized  lands  men  desire  in  turn  the  services 
of  the  baker,  the  blacksmith,  the  paper  hanger,  the  piano 
tuner,  and  the  dentist.  Some  of  the  services  yield  directly 
psychic  income,  and  some  are  embodied  in  material  goods 
which  yield  a  psychic  income.  These  various  ultimate  serv- 
ices and  incomes  have  different  values  from  period  to 
period.  These  values  serve  as  a  guide  in  the  application  of 
each  kind  of  labor,  which  is  turned  now  in  this  direction,  now 
in  that,  to  render  the  most  valuable  ultimate  service  for  which 
it  Js  fitted.  Particular  kinds  of  labor-services  therefore  dif- 
fer in  desirability  at  any  moment,  and  tho  in  a  general  way 
these  differences  persist  in  large  measure,  yet  they  vary  con- 
stantly in  some  measure  with  changing  circumstances.  These 
facts  explain  the  constant  shifting,  and  attempts  at  shifting,  of 
laborers  from  one  occupation  to  another  (as  discussed  more 
fully  below  in  section  9  and  in  Chapter  19,  section  3  and  sec- 
tion 8). 

§  4.  Value  of  labor  to  the  isolated  laborer.  Let  us  now 
consider  the  problem  of  labor-valuation  as  it  might  present 
itself  to  an  isolated  laborer,  such  as  Robinson  Crusoe  on  his 


Ch.  18]  THE  VALUE  OF  LABOR  201 

island.  He  would  have  at  his  disposal  a  limited  fund  of 
material  resources,  tools,  weapons,  metal,  etc.,  and  a  limited 
fund  (let  us  call  it)  of  labor-services,  viz.,  his  own.  If  he 
had  much  more  wealth  (canoes,  house,  stock  of  food,  etc.)  and 
were  able  to  work  many  times  harder,  he  would  from  the  out- 
set be  able  to  gratify  his  desires  much  more  abundantly.  As 
it  is,  he  is  under  the  necessity  of  choosing  the  particular  way 
in  which  his  efforts  should  be  expended.  A  day's  labor  spent 
in  one  direction  may  give  a  much  more  valuable  result  than 
if  spent  in  another.  Crusoe's  first  task  was  to  secure  the 
valuable  supplies  on  the  wrecked  vessel.  (See  Chapter  2.) 
Until  this  was  done  it  would  have  been  folly  to  begin  to  build 
a  hut  or  to  till  the  soil.  In  this  work  of  salvage  the  various 
tasks  were  performed  in  a  certain  order  determined  by  this 
principle :  each  hour 's  labor  is  to  be  applied  where  its  result 
promises  to  have  the  most  value.  Next  he  turns  his  efforts 
toward  his  garden,  or  his  domestic  animals,  or  toward  build- 
ing a  house  or  a  canoe.  At  a  certain  season  of  the  year  a 
day's  labor  would  be  worth  far  more  in  the  garden  than  at 
carpentry. 

We  perceive  thus  that,  even  in  the  case  of  the  isolated 
laborer,  his  labor  has  no  predetermined  value  which  can  be 
transferred  to,  or  put  into,  its  material  products;  rather  the 
various  products  have  an  anticipated,  expected  value,  which 
serves  as  a  guide  in  apportioning  the  labor.  Labor  has  value 
attributed  to  it  according  to  the  value  of  its  products,  now 
higher  and  again  lower  than  usual.  An  hour's  labor  even  of 
the  same  man  does  not  of  necessity  have  the  same  value  in 
different  tasks  at  the  same  moment,  or  in  the  same  task  at 
different  times  and  under  different  conditions.  Much  less 
should  we  expect  the  labor  of  different  men  to  be  of  equal 
value  when  numbers  of  men  meet  and  trade  in  a  market. 

Moreover,  labor  is  applied  according  to  expectation-valua- 
tions (a  present  valuation  of  the  future  desirability),  and 
these  expectations  may  be  mistaken,  being  either  too  large  or 
too  small.     Some  undertakings  turn  out  well,  some  ill.     The 


20a  VALUABLE  HUMAN  SERVICES,  AND  WAGES       [Pt.  Ill 

weather  may  be  more  or  less  favorable,  the  insect  pest  be 
especially  troublesome,  while  many  other  turns  of  good  luck 
or  bad  luck  may  give  results  far  out  of  line  with  the  expecta- 
tion-valuations which  guided  the  application  of  labor.  There- 
fore, the  products  have  value  not  because  a  certain  quantity 
of  labor  has  been  put  into  them,  but  rather  a  certain  kind 
and  duration  of  labor  has  been  put  into  them  because  of  the 
expectation  that  the  products  will  have  a  certain  value. 

The  play-element  and  the  pleasure-in-work-element  likewise 
enter  into  the  valuation  of  material  products,  by  increasing 
the  supply  of  some  as  compared  with  others.  If  Crusoe  liked 
caring  for  animals  better  than  he  liked  to  dig  and  plant,  he 
would  spend  more  time  with  his  flocks  and  less  time  in  his 
garden  than  if  he  liked  both  kinds  of  work  equally  well.  He 
would  more  or  less  unconsciously  choose  his  work  differently 
than  if  he  were  merely  weighing  meat  against  vegetables  as 
kinds  of  food.  He  is  choosing  psychic  income  rather  than 
mere  physical  objects,  and  therefore  the  value  of  the  objects 
is  still  further  out  of  line  with  the  time-amounts  of  labor  put 
upon  the  material  goods. 

In  view  of  these  facts  it  is  clear  that  the  values  of  products 
of  equal  periods  of  one's  own  labor  (i.e.,  the  part  attributable 
to  labor)  have  very  unequal  values  to  the  isolated  laborer. 

§  5.  Rewards  and  sacrifices  incident  to  occupations. 
Even  those  men  who  are  equally  fitted  for  several  occupations 
have  many  motives  besides  the  material  result  to  choose  one 
calling  rather  than  another.  Many  of  these  motives  result 
from  differences  in  purely  personal  qualities  of  temperament 
and  habit  (we  are  not  considering  now  differences  in  ability). 
One  man  enjoys  being  out-of-doors  or  likes  physical  exercise, 
another  prefers  a  sedentary  occupation,  one  delights  in  es- 
thetic surroundings,  another  prefers  to  work  with  machinery 
more  than  do  most  other  men.  (See  above,  section  4,  on 
Crusoe's  choice  of  the  work  he  liked.)  But  besides  these  dif- 
ferences from  man  to  man  there  are  differences  inherent  in  the 
occupations,   which  make   them  more   or  less  attractive   to 


Ch.  18]  THE  VALUE  OF  LABOR  203 

most  men  apart  from  the  evident  labor  income  that  they 
yield.  The  material  products  obtained  from  labor  (or  the 
wages  received,  see  next  chapter)  are  far  from  representing 
the  net  total  of  desirability  of  that  occupation  as  a  whole. 

If  now  there  are  two  or  more  occupations  that  are  equally 
open  to  men  of  a  certain  grade  of  ability,  but  that  are  unequal 
in  attractiveness,  the  more  attractive  will  be  chosen  by  more 
men.  Therefore  in  that  occupation  the  supply  of  labor  will 
be  greater,  the  services  more  abundant,  and  the  value  attrib- 
utable to  the  labor  must  be  less  than  in  the  other  occupation. 
Thus  it  often  happens  that  material  labor-incomes  evidently 
are  unequal  in  two  or  more  trades  calling  for  the  same  natural 
ability ;  or  again  two  laborers  of  very  unequal  ability  are  get- 
ting equal  material  labor-incomes — indeed  the  higher  income 
may  even  go  to  the  less  capable  man. 

A  little  study  of  actual  conditions  usually  suffices  to  clear 
away  our  first  impression  of  irrationality  in  such  cases. 
'■'Man  does  not  live  by  bread  alone,"  neither  does  one  choose 
his  work  in  life  with  regard  solely  to  material  rewards.  The 
total  attractiveness  of  occupations  (as  judged  by  the  laborer) 
depends  in  part  on  certain  elements  of  psychic  income,  plus 
or  minus,  on  certain  costs  or  deductions  which  must  be  taken 
into  account  in  one  trade  more  than  another,  and  on  certain 
long-time  or  ultimate  advantages  or  disadvantages  attached  to 
the  pursuit  of  particular  occupations. 

§  6.  Psychic  factors  in  labor-incomes,  (a)  Occupations 
differ  in  strenuousness,  or  degree  of  exertion  required,  some 
calling  for  the  output  of  muscular  energy  to  the  point  of 
exhaustion,  or  requiring  long  hours  (mills  with  twelve-hour 
shifts),  or  night  work.  For  the  same  reward  most  men  would 
prefer  day  work,  short  hours,  and  only  moderate  exertion. 

(b)  Occupations  differ  in  agreeableness.  Cleanliness  of 
store,  office,  or  shop,  permitting  the  wearing  of  clean  clothes 
is  valued  highly  by  some  men  and  still  more  by  young  women, 
who  therefore  (among  other  reasons)  are  ready  to  work  at 
clerical  occupations  for  much  lower  wages  than  they  could  get 


204  VALUABLE  HUMAN  SERVICES,  AND  WAGES      [Pt.  Ill 

in  mechanical  trades  or  in  domestic  service.  Noise,  dust, 
foul  smells,  darkness,  and  lack  of  ventilation  are  all  things 
that  are  avoided  by  most  workers  so  far  as  there  is  any  op- 
portunity to  choose  between  these  and  other  conditions  with- 
out too  great  a  sacrifice  of  other  advantages.  Good  physical 
surroundings  of  rural  life  make  many  salaried  men  content 
with  much  smaller  incomes  than  they  could  get  in  the  city, 
whereas  some  laborers  cannot  be  tempted  to  the  country  by 
high  wages  away  from  what  they  deem  the  greater  charms  of 
crowded  city  streets,  the  movies,  and  an  occasional  glimpse  of 
Coney  Island.  Congenial  companionship  is  to  many  natures 
the  greatest  need,  which  outweighs  almost  any  material  advan- 
tage. The  moral  conditions  in  the  place  of  work  must  accord 
with  one's  standards  if  the  work  is  not  to  be  distasteful.  Like- 
wise the  suffering  imposed  by  sickness  and  accidents  reduces 
the  agreeableness  of  an  occupation. 

(c)  Occupations  differ  in  degree  of  social  esteem  or  dises- 
teem  attached  to  them,  and  this  is  to  most  men  an  important 
element  of  psychic  income  (positive  or  negative)  in  weighing 
the  net  rewards  of  various  callings.  The  measure  of  social 
esteem  attached  to  any  occupation  is  no  doubt  the  result  of 
popular  judgment  as  to  the  quality  of  persons  who  usually 
follow  that  occupation.  If  the  ministry,  some  kinds  of  teach- 
ing, the  learned  professions  generally,  social  service,  banking, 
music,  and  art  rank  high  in  social  esteem,  it  is  because  in  the 
long  run  and  on  the  average  the  public  admires  the  kind  of 
persons  (morally  and  intellectually)  who  succeed  in  such 
work.  But  the  judgment  of  an  occupation  becomes  some- 
what conventionalized,  and  often  those  who  are  lacking  in  the 
full  measure  of  the  qualities  hope  by  entering  the  occupation 
to  shine  by  reflected  glory.  In  turn,  it  is  in  the  power  of 
any  individual  in  our  democratic  society  to  change  appreci- 
ably the  estimate  of  an  occupation  in  a  community  by  his 
standard  of  achievement  and  of  character. 

The  average  pecuniary  or  material  rewards  of  an  occupation 
are  likely  to  be  less  in  proportion  as  it  enjoys  high  social 


Cii.  18]  THE  VALUE  OF  LABOR  205 

esteem  (as  compared  with  occupations  requiring  the  same 
grade  of  ability).  On  the  contrary,  if  the  public  sentiment 
against  an  occupation  is  strong,  those  who  follow  it  are  often 
able  to  get  a  much  larger  reward  than  they  could  in  another 
calling,  as  for  example,  gamblers,  a  certain  type  of  criminal 
lawyers,  and,  in  some  neighborhoods,  saloon  keepers  and 
bartenders. 

§  7.  Costs  and  deductions  from  nominal  labor-incomes. 
(a)  The  difficulties  of  preparation  for  the  pursuit  of  various  oc- 
cupations are  very  unequal  (in  themselves,  quite  apart  from 
the  differences  in  natural  fitness  as  among  individuals). 
Partly  the  inequality  lies  in  the  strenuousness  of  application 
required  of  the  learner,  partly  in  the  length  of  time  before 
the  preparation  is  finished,  partly  in  the  cost  incurred  for 
support,  for  tools  and  materials,  and  for  instruction.  The 
greater  these  difficulties  the  greater  the  beginner's  discour- 
agement from  choosing  this  as  compared  with  other  occupa- 
tions. Hence,  unless  there  are  enough  other  offsetting  advan- 
tages, the  occupation  with  the  high  cost  of  preparation  must 
be  more  highly  rewarded,  or  nobody  would  choose  these  oc- 
cupations; in  other  words,  the  expected  labor-incomes^   (in 

3  But  this  does  not  mean  that,  other  things  being  equal,  the  difference 
between  the  labor-incomes  of  two  occupations  must  exactly  equal  the 
difference  in  costs  of  preparation  for  the  two  occupations;  for  the 
costs  are  present  or  in  the  near  future,  and  the  larger  labor-incomes 
are  in  the  more  or  less  distant  future,  till  the  end  of  the  probable 
working  life.  Hence  the  problem  of  time-value  enters.  The  future  in- 
comes have  a  smaller  (discounted)  value  at  the  present.  In  many  work- 
ing-men's families  the  difficulty  of  meeting  present  costs  of  preparation  is 
so  great  that  a  large  increase  of  wages  or  salary  is  insufficient  to 
induce  the  beginner  to  make  the  sacrifice.  (See  above  ch.  17,  sees.  4,  12, 
on  the  importance  of  preparation.)  The  rate  of  time-preference  in 
such  families  is  extremely  high.  The  problem  here  is  in  nature  that  of 
the  active  investment  of  capital  (see  Part  V)  and  involves  a  large 
element  of  uncertainty.  Often  the  expenses  of  industrial  education  are 
returned  many  fold  in  the  form  of  larger  labor-incomes  to  the  indi- 
vidual, but  in  some  cases  the  expense  is  "thrown  away"  because  of 
the  incapacity  or  of  the  moral  weakness  of  the  learner. 


206  VALUABLE  HUMAN  SERVICES,  AND  WAGES       [Pt.  Ill 

material  form  or  as  money-wages)  must  have  a  value  enough 
higher  to  offset  at  the  moment  of  choice  the  higher  cost  of 
preparation. 

(b)  The  clearly  apparent  rewards  of  various  occupations 
are  often  quite  different  from  the  real  rewards,  judged  even 
in  material  terms  (the  amounts  of  goods  received).  Partly 
this  is  due  to  special  costs  required  in  some  cases,  such  as  pro- 
viding tools  (carpenters),  wearing  better  clothes  (salesmen 
and  saleswomen),  which  costs  are  not  entirely  offset  by  social 
esteem;  partly  it  is  due  to  living  in  a  more  expensive  neigh- 
borhood in  one  case  than  in  another,  as  a  condition  of  getting 
the  higher  income.  For  example,  the  higher  wages  in  the 
Northern  States  as  compared  with  the  Southern,  are  in  part 
offset  by  the  need  of  more  clothing  and  fuel,  and  by  higher 
costs  of  house  rents  and  food.  In  general  the  cost-of-living 
in  the  country  districts  is  less  than  in  cities,  varying  roughly 
with  the  size,  and  real  wages  in  all  these  cases  are  much 
nearer  equality  than  they  appear  to  be.  If  this  were  not  so, 
migration  would  quicldy  bring  about  a  closer  agreement. 

§  8.  The  long'-time  and  ultimate  rewards  of  labor,  (a) 
Occupations  differ  on  the  average  in  danger  to  life  and  limb, 
and  to  health,  as  do  also  particular  establishments  in  the  same 
occupations,  because  of  differences  in  lighting,  ventilation, 
dust,  fumes,  machinery,  and  methods  of  safeguarding  the 
workers.  Quite  apart  from  the  question  of  agreeableness 
(treated  above,  section  6)  there  are  differences  in  the  expec- 
tation of  income  because  of  medical  and  other  expenses  and 
loss  of  time  from  accidents  and  sickness.  This  expectation 
of  loss  should  be,  and  doubtless  is  to  some  degree,  offset  by  a 
higher  wage  in  a  more  hazardous  occupation,  to  induce  any 
individual  (within  the  range  of  his  possible  choice)  to  choose 
it  rather  than  a  safe  occupation.  But  it  is  questionable 
whether  this  difference  in  money-rewards  comes  anywhere 
near  equaling  the  chance  of  loss  and  danger  expressed  in 
money-terms.  The  reward  is  definite  and  present,  whereas 
the  danger  is  distant  and  vaguely  felt.     The  more  needy  and 


Ch.  18]  THE  VALUE  OF  LABOR  207 

improvident  the  worker  the  less  he  can  or  will  estimate  the 
danger  and  the  more  relatively  (because  of  his  high  rate  of 
time-preference)  will  he  value  a  slight  increase  in  present 
reward. 

(b)  Occupations  differ  in  regularity  of  employment.  The 
short-time  rewards  in  the  seasonal  trades,  such  as  bricklaying, 
mason-work,  etc.,  are  usually  noticeably  higher  than  in  the 
steady  occupations  that  call  for  the  same  kind  of  ability  and 
preparation.  But  the  more  irregular  the  employment  the 
greater  the  loss  from  being  out  of  work,  and  the  smaller  is 
the  total  annual  income  as  compared  with  the  income  earned 
by  the  hour,  day,  week,  or  month.  Much  of  the  difference 
in  labor-incomes  in  such  cases  is  nominal  rather  than  real. 

(c)  The  chance  of  success  or  failure  in  an  occupation  enters 
into  the  calculations  of  a  beginner.  The  greater  certainty 
of  success  in  one  case  must  be  to  some  extent  offset  by  higher 
rewards  in  the  other.  This  element  is  of  course  supplemented 
or  neutralized  by  other  considerations ;  for  example,  the  small 
chance  of  success  in  law  is  to  some  extent  offset  by  oppor- 
tunities in  politics,  business,  and  often  in  social  affairs.  In 
salaried  positions  the  greater  chance  of  success  appears  in  the 
form  of  opportunities  of  promotion.  Some  less  provident  or 
less  able  to  wait  take  the  positions  that  give  a  living  income 
from  the  first,  but  which  lead  nowhere,  and  others  take  the 
larger,  but  more  distant  income. 

In  all  these  cases  there  is  an  adjustment  of  rewards  through 
the  choice  of  occupations.  If  within  the  range  of  choice  open 
to  a  group  of  individuals  there  is  one  occupation  that  is  less 
attractive  than  others  in  all  excepting  the  material  reward 
(or  the  money  wage)  fewer  will  choose  that,  and  more  wiU 
choose  the  more  attractive  occupation;  the  result  must  be  a 
rise  of  the  value  of  services  in  the  one  and  a  fall  in  the  other, 
until  an  equilibrium  of  net  advantages  is  attained,  to  those 
entering  or  free  to  choose  between  the  various  occupations. 

§  9.  Rarity  of  ability  limiting  choice  of  occupations. 
But  even  if  all  these  psychic  factors  be  duly  accounted  for, 


208  VALUABLE  HUMAN  SERVICES,  AND  WAGES      [Pt.  Ill 

it  is  still  evident  that  some  men  obtain  a  larger  income  for 
their  services  than  others  do.  This  is  true  whether  they  con- 
sume the  results  of  their  own  labor,  or  sell  them  to  others,  or 
wort  for  other  men  for  a  wage.  JMoreover,  some  labor  having 
the  highest  value  is  the  least  strenuous  and  performed  in  the 
midst  of  the  pleasantest  surroundings,  whereas  most  of  the 
labor  of  the  least  value  is  the  most  arduous,  disagreeable,  and 
dangerous  to  health  and  to  life.  The  laborers  with  low  in- 
comes thus  have  a  motive  to  shift  to  more  highly  rewarded 
occupations.  "Why  do  they  not  do  it?  The  answer  is  that 
they  do  to  the  extent  of  their  respective  abilities,  knowledge, 
strength  of  will,  and  opportunities  (limited  of  course  by  habit 
and  by  valuation  of  psychic  income).  But  the  various  labor- 
ers have  limited  abilities  and  can  not  change  at  will  and, 
despite  the  unfavorable  ratio,  they  may  be  compelled  to  con- 
tinue at  the  same  work.*  Just  as  fields,  plows,  machinery  for 
various  purposes,  grade  off  from  the  best  to  the  poorest  on 
the  margin  of  use  or  already  discarded,  so  men  differ  in  their 
powers  of  labor.  There  are  high  value,  low  value,  and  no- 
value  men  and  services  of  men.^  Even  were  there  everywhere 
entire  political  freedom,  and  no  legal  influence  of  caste  or 
status  hindered  the  mobility  of  labor,  mobility  still  would  be 
hindered  by  the  inequality  and  the  rarity  of  ability.  Just  as 
apples  can  not  be  changed  to  peaches  or  sheep  to  horses  when 
there  is  a  change  in  their  value,  so  the  unskilled  workman 
can  not  be  changed  to  a  skilled  workman  quickly,  if  he  ever 

♦Recall  the  disparity  of  talents  ch.  16,  sec.  12. 

B  Recognizing  the  variety  and  inequality  of  human  talent,  some 
economists  have  spoken  of  the  "rent  of  ability"  and  of  "producers'  rent." 
It  is  true  that  the  difference  in  the  rewards  of  labor,  like  land-rent, 
reflects  the  difference  in  the  quality  of  agents;  but  this  expression  (the 
rent  of  ability)  is  to  be  avoided.  While  possibly  it  is  suggestive  in 
studying  some  problems,  it  is  at  best  only  an  analogy,  and  on  the 
whole  a  misleading  one,  confusing  the  terminology  of  rent  and  wages 
and  dimming  the  distinction  between  free  workers  and  owned  and 
exchangeable  wealth.  See  note  on  various  meanings  of  rent,  at  end  of 
ch.  14. 


Ch.  18]  THE  VALUE  OF  LABOR  209 

can.  The  possibility  of  workers  changing  within  any  brief 
period  to  occupations  necessitating  different,  not  to  say  higher, 
training  is  very  small  indeed.  The  individual  laborers  are 
constantly  trying  to  adjust  themselves,  to  get  into  places 
where  they  can  earn  larger  incomes.  Some  move,  some  emi- 
grate, some  seek  practice  and  education.  Especially  the  work- 
ers  between  the  ages  of  fifteen  and  twenty-five  are  at  the  time 
of  life  to  choose  the  callings  that  promise  to  each  the  highest 
reward.  Within  limits  an  adjustment  is  possible,  but  these 
limits  are  not  wide  or  not  quickly  shifted,  and  the  incomes 
of  particular  laborers  and  groups  of  laborers  continue  to  be 
very  unequal  in  different  occupations.  Such  changes  of  oc- 
cupation as  are  made  are  far  from  enough  to  bring  the  values 
of  the  different  services  and  their  results  to  a  common  level. 

§  10.  Imputation  of  value  to  labor  and  to  uses  of  wealth. 
Labor  does  not  work  with  an  equipment  of  free  goods  even 
on  Robinson  Crusoe's  island.  (See  section  4  above.)  Crusoe 
had  a  limited  stock  of  cleared  land  and  of  other  agents,  some 
of  which  were  irreplaceable.  His  valuation  of  them  was  im- 
plied in  the  choice  and  use  made  by  him  of  these  various 
agents  when  used  in  connection  with  his  labor.  A  part  of 
the  total  product  of  an  isolated  worker  as  a  matter  of  value- 
estimation  or  imputation  is  a  labor-income.  Tho  Crusoe  had 
no  occasion  to  apportion  exactly  the  two  parts  of  his  divisible 
income,  even  a  Crusoe  in  his  choices  would  not  attribute  the 
total  value  of  the  product  to  his  own  labor.  He  is  valuing 
material  agents  and  labor  together  in  a  given  economic  situa- 
tion. He  might  perhaps  think  and  say,  ''I  made  this,"  or, 
"I  made  that,"  but  he  would  constantly  and  necessarily  act 
in  a  way  that  imputed  a  value  to  scarce  material  agents  no 
matter  whether  much  or  little  labor  had  been  put  upon  them. 

Each  kind  of  goods  and  each  act  of  labor  is  valued  in  ac- 
cordance with  the  psychic  income  which  it  helps  to  secure. 
The  value  of  the  psychic  income  is  reflected  to  the  agents  of 
production.  An  isolated  laborer,  such  as  Crusoe,  would,  how- 
ever, not  have  as  definite  and  complete  a  scale  of  values  as 


210  VALUABLE  HUMAN  SERVICES,  AND  WAGES       [Pt.  Ill 

that  which  arises  in  an  exchange  economy  where  money  serves 
as  a  common  denominator  of  values.  The  independent 
farmer,  producing  on  his  own  farm  nearly  everything  he 
consumes,  is  able  to  think  somewhat  more  clearly  of  his  labor 
and  his  wealth  as  separate  sources  of  income,  for  he  can  earn 
wages  by  working  for  some  one  else  and  he  can  let  his  farm 
for  a  money-rent.  Moreover,  he,  like  Crusoe,  is  constantly 
imputing,  in  his  mode  of  use,  a  value  to  the  farm  and  to  his 
own  labor.  This  being  true,  the  phrase  "labor  produces"  is 
always  misleading,  for  it  suggests  that  the  whole  product  is 
the  result  of  labor  alone,  whereas  products  result  from  the 
combined  action  of  the  uses  of  materials  and  the  services  of 
labor.  The  total  value  is  reflected  back  and  imputed  to  the 
various  agents  in  due  proportion.  The  phrase  used  should 
always  be  ** labor  helps  to  produce." " 

«The  "labor  theory  of  value"  survives  from  the  time  when  the 
workman's  kit  of  tools  was  so  small  that  the  true  labor-income  of  the 
handworker  was  little  less  than  his  total  receipts.  The  tinker,  the 
shoemaker,  and  the  tailor,  who  went  from  house  to  house  in  the  old 
days,  thought  only  in  the  vaguest  way  of  marking  off  from  their 
incomes  a  part  to  be  accounted  as  the  yield  of  their  little  outfit  of 
tools.  Labor  therefore  was  thought  of  as  the  chief  and  almost  the  sole 
cause  of  the  value  of  goods  produced  by  artisans.  The  error  in  this 
view  grew  greater  and  greater  with  the  increase  of  modern  machinery, 
and  it  persists  in  many  fallacious  notions  not  only  in  popular  thought 
but  in  systematic  economics. 


CHAPTER  19 
PRINCIPLES  OF  WAGES 

§  1.  The  price  of  labor.  §  2.  The  self-directing  laborer's  income  from 
sale  of  products.  §  3.  Shifting  of  labor  to  the  point  of  highest  return 
to  the  laborer.  §  4.  Fees  for  temporary  direct  services.  §  5.  The  con- 
tinuous wage-contract  for  personal  service.  §  6.  Price  of  labor  employed 
on  products  to  sell.  §  7.  Various  grades  of  labor  and  rates  of  wages. 
§  8.  Doctrine  of  non-competing  classes.  §  9.  Basis  of  the  personal  bar- 
gaining power  in  the  wage-contract.  §  10.  Friction  in  the  adjustment 
of  wages.  §  11.  Uniqueness  of  separate  services.  §  12.  Labor-incomes 
and  wealth-incomes.  §  13.  The  wage  system.  §  14.  Wages  and  the 
general  economic  situation.  Notes  on  The  labor-theory  of  value,  Various 
methods  of  remuneration,  Real  wages  in  Europe  and  America,  and  Value 
versus  utility  of  labor. 

§  1.  The  price  of  labor.  In  the  last  chapter  have  been 
considered  the  circumstances  affecting  the  value  of  human 
services.  The  labor  has  value  in  the  estimation  of  some  per- 
son or  persons  because  the  labor  yields  a  psychic  income  either 
directly  or  indirectly.  We  now  turn  to  consider  the  price  of 
labor.  Just  as  the  value  of  direct  commodities  comes  to  be 
expressed  in  a  price  in  sale,  and  as  the  value  of  the  uses  of 
durable  agents  (usance)  comes  to  have  a  price  called  rent,  so 
the  value  of  any  labor  that  is  capable  of  being  sold,  that  is 
performed  for  another  for  pay,  comes  to  bear  a  price  called 
wage,  or  wages. 

Like  every  price,  wage  involves  a  contractual  relation  more 
or  less  temporary,  between  two  persons,  the  one  selling  and 
the  other  buying  labor.  The  buyer  is  the  employer  and  the 
seller  is  the  employee,  or  the  wageworker,  or  the  hired  man. 
All  that  has  been  said  above  of  the  principles  of  value  in  rela- 
tion to  labor,  holds  of  course  of  wages,  whenever  the  labor  is 

211 


212  VALUABLE  HUMAN  SERVICES,  AND  WAGES       [Px.  Ill 

being  measured  in  a  market  and  its  value  is  being  expressed 
in  terms  of  something  paid  for  the  labor.^ 

§  2.  The  self -directing  laborer's  income  from  sale  of 
products.  Before  considering  the  case  of  contractual  wage- 
payment,  where  one  man  is  hired  by  another,  let  us  see  what 
occurs  when  a  number  of  self -directing  laborers  come  together 
into  trading  relations  with  their  products.  In  this  case  there 
is  a  market  for  goods  and  there  are  prices  for  goods  that  have 
been  produced  by  the  aid  of  labor,  but  there  are  only  valua- 
tions and  not  prices  for  labor  services.  Such  was  the  state  of 
industry  in  early  and  medieval  times,  and  in  large  measure 
these  conditions  still  are  found  in  modern  society.  Each 
trader  would  originally  come  to  the  market  with  a  scale  of 
valuations  for  all  his  different  goods,  reflecting  his  own  un- 
equal fitness  for  different  tasks,  and  he  would  meet  men  having 
very  different  scales  of  valuation  due  to  the  variety  and  dis- 
parity of  their  talents.  If  one  man  can  make  arrows  and 
canoes  very  well  but  is  too  slow  to  hunt,  and  the  other  is  a 
good  hunter  but  a  poor  worker  in  wood,  there  is  mutual  gain 
in  division  of  labor  and  barter.  (See  Chapter  5,  section  7.)  If 
several  traders  are  present  so  that  the  higgling  element  of  iso- 
lated barter  is  reduced,  a  true  market-price  is  found  for  the 
goods  resulting  from  each  laborer's  services.  In  the  presence 
of  this  price  the  individual  valuations  are  adjusted  to  the 
whole  economic  situation,  are  socialized  in  the  market.  (See 
above,  Chapter  7.) 

Goods  exchanged  in  this  way  evidently  are  not  valued  ac- 
cording to  the  amount  of  labor  measured  by  labor-hours,  or 
by  painful  exertion.     They  are  valued  by  the  strength  of  de- 

iThe  wage  being  a  tangible  market-fact  was  first  studied  when 
economics  began  to  be  a  science,  and  it  was  seen  that  the  wage  was 
but  the  reflection  of  a  valuable  service.  So  the  term  wage  was  ex- 
tended to  this  value  of  the  service  which  was  called  the  "natural  wage" 
— more  often  of  late  the  "economic  wage."  In  this  book,  however,  the 
term  wages  is  confined  to  the  price  aspect  of  labor,  while  labor-yield 
(which  is  labor-income  to  some  person)  is  the  physical  product  or  the 
valued  service  given  off  by  an  action. 


Ch.  19]  PRINCIPLES  OF  WAGES  213 

sires  as  expressed  in  choice;  some  goods  that  are  produced 
easily  by  little  labor  may  have  a  high  value,  and  other  goods 
that  are  produced  by  much  hard  and  disagreeable  labor  must 
have  a  low  value.- 

§  3.  Shifting  of  labor  to  the  point  of  highest  return  to 
the  laborer.  The  fisherman  as  he  follows  his  vocation  (as  a 
self-directing  laborer)  gets  an  income  in  the  form  of  the  price 
of  the  fish  he  catches  every  day  (less  cost  of  maintaining  his 
equipment).  The  value  of  this  income  is  a  complex  of  the 
usance  attributable  to  the  equipment,  a  very  small  amount,  and 
of  the  value  of  his  own  labor.  The  market  conditions  for  fish 
determine  the  value  of  his  labor.  If  in  the  long  run  he  earns 
less  than  he  could  get  in  another  equally  agreeable  occupation 
requiring  no  greater  equipment,  to  which  he  will  and  can 
transfer,  he  will  leave  fishing.  If  he  does  change  and  gets  a 
larger  labor-income  this  is  but  the  reflection  of  the  higher- 
priced  product  in  the  new  occupation.  Similarly,  the  gold- 
miner,  working  with  simple  tools  in  the  days  of  placer-mining, 
got  an  income  determined  by  the  value  of  the  gold  he  washed 
out.  It  was  for  this  that  he  gave  up  his  former  occupation 
and  went  to  the  gold  fields.  In  like  manner  the  farmer,  the 
cloth  weaver,  the  furniture  maker,  etc.,  would  find  the  occu- 
pation in  which  his  labor  would  produce  goods  of  the  greatest 
value  (differences  of  psychic  income  being  allowed  for).^ 
Thus  we  must  conceive  of  a  state  of  equilibrium  where  each 
kind  of  labor  would  be  applied  to  the  production  of  that  kind 
of  goods  which  will  yield  it  the  largest  possible  income,  and 
where  there  is  no  one  at  the  moment  that  can  change  to  an 
occupation  paying  better  on  the  whole. 

In  any  labor  market,  each  grade  of  labor  may  be  looked 
upon  as  a  potential  supply  of  desirable  things  and  its  value 
is  determined  as  if  it  were  an  actual  supply.  If  all  the  vari- 
ous goods,  psychic  and  material,  that  labor  produces  were 
spread  out  before  men  in  visible  form,  some  would  be  in  great 

2  See  note  at  end  of  chapter,  on  The  labor-theory  of  value. 

3  See  note  at  end  of  chapter,  on  Value  versus  utility  of  labor. 


214  VALUABLE  HUMAN  SERVICES,  AND  WAGES       [Px.  Ill 

demand,  some  would  exchange  at  a  very  unfavorable  ratio 
with  others.  The  market  for  goods  would  come  to  equilibrium 
at  a  point  where  each  buyer  had  adjusted  his  supply  of  serv- 
ices in  the  most  favorable  way,  had  distributed  his  purchas- 
ing power,  as  represented  by  his  labor,  so  as  to  get  those 
kinds  and  amounts  of  goods  (including  services  of  others) 
which  gratify  his  desires  in  the  highest  possible  manner. 

Corresponding  with  this  state  of  equilibrium  on  the  buyers' 
side,  would  be  at  the  point  of  the  theoretically  correct  market- 
price,  an  equilibrium  on  the  sellers'  side.  Wherever  and  in  so 
far  as  free  competition  exists,  there  is  a  constant  adjustment 
and  striving  toward  such  a  state  of  equilibrium.  Each  work- 
man is  moving  into  the  industry  where  he  earns  the  highest 
amount  possible  to  him;  that  is,  the  highest  price  which  any 
of  his  fellow-men  are  willing  to  pay  for  the  service  (embodied 
in  goods)  which  he  can  and  will  perform.  Each  man's  in- 
come is  determined  by  the  desirability  of  his  services  as  bid 
for  by  the  other  members  of  his  community.  His  value  to 
others  determines  his  economic  place  just  as  the  specific  grav- 
ity of  liquids  of  different  densities  poured  into  a  glass  deter- 
mines their  place.  In  actual  life  various  disturbing  factors 
prevent  the  full  realization  of  this  condition,  but  the  prac- 
tical process  by  which  labor  is  valued  is  that  which  we  have 
been  describing.  Each  laborer  in  a  true  market  should  get 
close  to  what  his  services  "are  worth"  in  the  sense  of  their 
economic  value  to  the  purchaser.* 

•*Thi8  in  no  wise  is  to  be  taken  to  assert  the  social  desirability  of 
low  wages,  or  the  justice  of  actual  wages  either  in  any  particular  case 
or  in  general.  Some  thinkers  have  assumed  and  have  asserted  that 
the  competitive  wage  is  the  wage  which  is  "theoretically  correct"  in  an 
ethical  sense.  The  process  of  valuation  which  we  are  describing,  how- 
ever, leads  us  to  the  conclusion  that  under  competitive  conditions  a 
man  gets  what  he  "is  worth"  to  the  purchaser  merely  in  the  value  sense; 
he  gets  the  maximum  sum  possible  in  view  of  the  nature  of  his  service 
and  of  the  existing  conditions  of  demand  and  supply.  But  these  con- 
ditions are  more  or  less  dependent  at  any  given  time  upon  various 
antecedent  circumstances,  such  as  the  distribution  of  wealth,  inheritance, 


Ch.  19]  PRINCIPLES  OF  WAGES  215 

§  4.  Fees  for  temporary  direct  services.  On  the  very 
borderline  between  the  class  of  self-directing  laborers  and 
regular  wage-employees  is  the  class  of  laborers  which  is  tem- 
porarily employed  to  do  a  definite  service  directly  for  others, 
receiving  therefor  a  payment  or  fee.  The  barber  shaves  his 
patron,  the  ferryman  takes  the  traveler  across  the  river,  the 
boy  carries  a  message,  the  surgeon  sets  a  broken  arm.  Of  a 
like  nature  are  the  fees  for  services  of  bootblacks,  messengers, 
porters,  doctors,  lawyers,  etc.,  when  there  is  no  continuing 
contract  of  employment.  Each  performs  a  valuable  service, 
which  is  sold  to  the  beneficiary  but  produces  no  long-abiding 
material  result,  and  no  separable,  saleable,  material  good.  Lit- 
tle different  is  the  case  of  custom-made  production  once  very 
common,  now  infrequent,  where  the  customer  took  his  own 
cloth  to  the  tailor  to  be  made  into  a  suit,  leather  to  the  cob- 
bler to  be  made  into  shoes,  and  wheat  to  the  miller  to  be 
ground  into  flour.  The  artisan  owned  his  own  tools,  and 
stayed  in  his  own  shop,  and  was  paid  for  the  definite  service 
of  imparting  new  form-value  to  the  materials.  There,  clearly, 
his  earnings  in  the  long  run  would  be  adjusted  in  a  market 
for  labor  services. 

"When  the  buyer  of  labor  is  a  merchant  who  supplies  the  ma- 
terials and  pays  for  the  form-change  made  in  the  home  or  shop 
of  the  worker,  the  system  of  work  is  called  domestic  produc- 
tion, sometimes  factor  or  commission  work,  sometimes,  in  cities, 
tenement-house  work.  This  is  still  common  in  the  weaving 
of  silk  in  Europe,  and  in  the  manufacture  of  clothing  in 
America,  and  in  some  other  cases.  The  artisan  has  here  less 
independent  action,  has  no  dealing  directly  with  the  ultimate 
consumer  of  his  services,  and  is  very  near  to  being  a  piece- 
price  wage-earner;  but  if  he  still  owns  his  tools  it  is  not  a 
clear  case  of  wage-payment.    We  hesitate  to  call  any  of  these 

the  growth  of  population  in  the  different  classes  of  society,  etc.  Our 
present  analysis,  therefore,  involves  no  ethical  judgment  of  a  competitive 
wage-scale  one  way  or  another.  That  is  a  question  for  separate  con- 
sideration. 


216  VALUABLE  HUMAN  SERVICES,  AND  WAGES       [Pt.  Ill 

cases  of  wage-payment,  tho  they  come  very  near  to  it.  But 
when  we  come  to  the  case  of  the  artisan  (e.g.,  a  carpenter), 
even  tho  he  may  own  his  own  tools,  who  works  for  an  em- 
ployer in  a  place  chosen  and  controlled  by  the  employer,  we 
consider  it  a  case  of  wage-payment.  In  these  border  cases 
we  see  very  plainly  how  the  services  are  valued  and  sold  apart 
from  the  material  to  which  they  are  applied. 

§  5.  The  continued  wage  contract  for  personal  services. 
In  ordinary  domestic  service  the  laborer  is  employed  for  a 
longer  or  shorter  time  to  give  a  series  of  services,  some  per- 
sonal and  direct,  and  others  more  or  less  indirect.  The  wealthy 
man  does  not  hire  a  coachman  each  time  he  wishes  to  take  a 
ride,  but  having  summed  up  the  advantages  of  a  coachman's 
services,  he  buys  them  by  the  month  or  the  year.  The  price 
is  determined  in  the  market  for  coachmen  of  the  needed  abil- 
ity, qualities  ranging  from  stupid  to  bright,  from  weak  to 
strong,  and  from  drunk  to  sober.  Instead  of  buying  flowers 
from  day  to  day,  a  wealthy  man  hires  a  gardener  to  cultivate 
them  in  a  conservatory.  The  average  market-price  of  flowers 
influences  the  wages  paid  to  the  gardener,  his  wages  being 
but  the  sum  of  the  values  (or  of  his  imputed  part  in  the  val- 
ues) of  flowers,  well-kept  lawn,  and  garden  products.  Of  a 
like  nature  are  the  services  of  cooks,  waiters,  tutors,  musi- 
cians, and  teachers  in  private  employment,  etc.  Between  two 
and  three  million  persons  are  employed  in  this  way  in  Amer- 
ica. According  to  the  conditions  of  each  household  and  of 
the  general  market,  the  one  or  the  other  mode  of  buying  these 
services  and  products  is  the  more  advantageous  to  the  con- 
sumer. The  wages  of  gardeners  in  private  employ  must  be 
in  pretty  close  agreement  with  the  wages  of  those  working 
in  commercial  gardening,  and  with  the  labor-incomes  of  the 
simpler  self-employing  gardeners. 

§  6.  Price  of  labor  employed  on  products  to  sell.  The 
payment  of  the  laborer  to  produce  goods  for  exchange  is  the 
most  common  modern  case  of  wages.  The  relation  of  wages 
to  the  value  of  the  product  is  in  this  case  more  complex,  for 


Ch.  19]  PRINCIPLES  OF  WAGES  217 

the  employer  is  directing  the  labor  to  meeting  the  desires  of 
others,  not  his  own  desires.  It  is  by  rightly  anticipating  the 
desires  of  prospective  customers  for  the  product,  and  suc- 
cessfully exchanging  or  selling  it,  that  the  employer  is  en- 
abled to  recover  the  amounts  paid  to  laborers.  When  indus- 
try becomes  complex,  the  connection  between  the  wages  and 
the  price  ultimately  realized  in  the  product  may  be  broken 
for  a  time,  but  rarely  for  a  very  long  time.  Because  of  mis- 
calculations, labor  is  sometimes  employed  on  things  that  prove 
to  be  quite  valueless,  and  on  othei*  things  that  have  a  much 
greater  value  than  was  expected.  When  months  or  years  in- 
tervene before  the  price  of  the  labor  is  realized  in  the  sale 
of  the  product,  the  employer  must  forecast  the  outcome  as  best 
he  can,  and  employ  labor  only  when  the  wages  promise  to  be 
recovered.  These  are  complicating  facts,  but  in  any  logical 
view  they  do  not  falsify  the  principle  that  wages  are  but 
the  commuted,  or  reflected  price  of  the  product  (i.e.,  of  that 
portion  of  the  product  which  under  market  conditions,  is 
reflected  to  the  labor ).^ 

Let  us  recall  again  that  labor  is  only  one  of  the  elements 
entering  into  the  product.  (See  last  chapter,  section  10.) 
Each  agent  in  industry,  whether  it  be  a  plow,  a  horse,  or  a 
man,  is  valued  in  connection  with  other  agents,  never  apart 
or  isolated.  It  is  not  the  total  service  that  any  one  of  them 
performs  that  can  be  got  at ;  all  that  can  be  got  at  is  the  value 
attributed  to  the  marginal  unit  of  supply,  that  is  to  every 
unit  of  like  quality  in  the  whole  economic  situation.  Each 
agent  is  considered  in  combination  with  other  things  at  a 
given  moment  under  existing  conditions.  Within  limits  labor 
may  be  substituted  for  the  other  elements,  fewer  machines 
being  used  and  more  laborers,  or  vice  versa.  It  is  said  that 
the  price  of  mules  at  the  Pennsylvania  mines  is  affected  by 
immigration,  for  a  mule  and  a  man  may  for  some  purposes 
be  substituted.    No  more  will  be  given  for  any  labor  than 

B  The  place  of  the  employer  as  midway  between  laborer  and  consumer, 
is  more  fully  treated  later,  under  enterprise,  in  Part  V. 


218  VALUABLE  HUMAN  SERVICES,  AND  WAGES      [Pt.  Ill 

the  employer  expects  it  to  add  to  the  value  of  the  product. 
The  employer  is  constantly  testing  the  value  of  each  kind  of 
labor  in  his  own  establishment  with  the  value  of  other  agents 
of  production.®  In  any  state  of  the  labor  market  the  wages 
of  any  labor  or  class  of  labor  tend  to  conform  to  the  value 
of  the  services  to  the  employer,  and  the  value  to  the  employer 
is  determined  by  the  price  which  the  ultimate  consumers  will 
pay  for  the  products 

§  7.  Vaiious  grades  of  labor  and  rates  of  wages.  Every 
grade  and  kind  of  ability  "has  its  rate  of  wages.  The  term 
general  rate  of  wages  can  be  used  only  of  a  certain  grade  of 
labor  and  of  the  rate  for  the  average  worker.  Also  it  is  some- 
times convenient  to  speak  in  a  broad  but  inexact  way  of  "a 
general  rate  of  wages,"  when  comparing  different  countries 
and  periods.  When  it  is  said  that  the  rate  of  wages  is  higher 
in  America  than  in  England,  in  England  than  in  France,  in 
France  than  in  India,  the  comparison  is  between  men  of  the 
same  occupation  in  the  different  countries ;  e.g.,  the  unskilled 
laborer  or  the  mechanic  gets  more  here  than  the  same  grade 
of  laborer  gets  in  England.  There  is,  however,  no  such  a 
thing  as  a  general  rate  of  wages  for  all  laborers  and  for  all 
industries  any  more  than  there  is  a  general  rate  of  land-rent 
for  all  acres  of  land.  In  any  one  kind  of  factory  all  grades 
of  ability  are  required,  from  the  pattern  maker  and  the  en- 
gineer, down  to  the  roustabout  in  the  yard.  The  industries 
of  manufacturing,  commerce,  and  education  alike  require  the 

8  It  is  only  in  tliis  superficial  sense  and  as  seen  from  the  employer's 
standpoint  that  wages  may  be  said  to  be  determined  by  productivity. 
It  is  productivity  in  the  sense  of  profitableness  or  selling  price  to  the 
employer  beyond  which  he  will  not  go.  There  is  no  such  thing  as  a 
separate  determinable  physical  productivity  that  is  due  to  labor. 
Only  more  or  less  of  the  value  of  the  product  may,  under  the  conditions 
of  the  market,  be  imputed  to  the  various  factors  of  production.  To 
say  therefore  that  wages  are  determined  by  productivity  is  to  define  in 
identical  terms:  the  price  of  the  product  is  determined  by  the  price  of 
the  product. 

">  See  note  on  Various  methods  of  remuneration,  at  the  end  of  chapter. 


r 


Cn.  19]  PRINCIPLES  OF  WAGES  219 

cooperation  of  bookkeepers,  janitors,  carpenters,  and  super- 
intendents. The  wages  of  different  grades  of  ability  within 
the  same  industry  differ  more  markedly  than  do  the  wages 
of  particular  classes  of  workers  in  different  industries.  For 
example,  a  bookkeeper  of  a  certain  grade  of  skill  gets  about 
the  same  whether  employed  in  a  factory,  a  store,  or  a  railroad 
office. 

When  wages  are  paid  in  the  form  of  money  it  becomes  im- 
portant to  distinguish  between  I'eal  and  nominal  wages.  Nom- 
inal wages  are  expressed  in  money,  and  real  wages  in  amount 
of  uses  and  services  the  money  will  buy.  In  comparing  the 
wages  of  different  classes  in  the  same  country,  or  of  the  same 
class  in  different  countries,  or  of  the  same  class  at  different 
periods  of  time,  real  and  nominal  wages  show  very  different 
situations  and  changes.  In  determining  the  net  advantages 
of  various  occupations  men  must  include,  as  we  have  seen, 
many  intangible  elements.  (See  Chapter  18.)  But  in  the  term 
real  wages  nothing  more  is  included  than  the  quantity  of  use- 
ful goods  (cloth,  food,  etc.),  and  of  rentable  uses  which 
can  be  bought  at  current  prices  with  the  money  wages.  This 
is  an  imperfect  but  often  very  enlightening  comparison.* 

§  8.  Doctrine  of  non-competing  classes.  Whatever  be  the 
methods  of  remuneration  and  the  scales  of  wages  prevailing 
in  the  various  industries  and  localities,  the  laborers  make 
their  choices  among  the  various  occupations  and  places  of  work 
open  to  them.  They  move  from  factory  to  factory,  from 
trade  to  trade,  from  town  to  town,  from  state  to  state,  from 
one  country  to  another,  seeking  each  to  better  his  fortune  or 
to  maintain  it  unimpaired.  The  worker  is  striving  to  get  for 
his  labor  the  maximum,  all  things  considered,  (as  set  forth  in 
Chapter  18,  section  9)  as  the  employer  is  usually  striving 
to  get  the  needed  service  at  the  lowest  price.  When  this  is 
so,  the  conditions  of  a  two-sided  market  are  present  and  a 
price  for  each  laborer's  services  results. 

The  variety  in  human  talents  and  the  many  difficulties  and 

8  See  note  on  Real  wages  in  Europe  and  America  at  end  of  chapter. 


220  VALUABLE  HUMAN  SERVICES,  AND  WAGES       [Pt.  Ill 

motives  which  hinder  the  change  from  one  occupation  to  an- 
other (set  forth  in  Chapters  16  to  18,  also  section  3  above) 
result  in  a  large  measure  of  immobility,  or  lack  of  inter- 
changeability  as  between  different  kinds  of  labor.  This  lim- 
ited power  of  adjustment  not  only  fixes  the  individual  in  a 
trade  his  life  long,  but  it  marks  ofE  whole  groups  from  each 
other  through  hereditary,  social,  and  geographical  barriers. 
This  has  been  put  into  the  form  of  a  doctrine  of  non-compet- 
ing classes  of  labor,  a  brief  statement  of  which  may  help  us 
to  see  the  problem  of  relative  wages  of  various  laborers  as 
one  of  the  mutual  valuations  of  services.  It  is,  however,  but  a 
restatement  of  the  ideas  already  presented  here. 

"Workers  may  be  thought  of  at  any  period  as  grouped  in 
classes,  not  only  as  to  different  occupations  (such  as  carpen- 
try, typesetting,  etc.)  but  as  to  grades  of  ability  in  perform- 
ing the  various  tasks.  Each  class  has  its  value  determined  by 
the  market  conditions,  as  for  the  time  a  separate  object  of 
value  having  a  comparatively  fixed  supply,  and  not  a  part  of  a 
homogeneous  mass  of  services.  Within  any  period,  greater 
or  less  changes  in  the  value  of  the  products  of  one  class  of 
labor  may  occur,  and  be  reflected  in  a  higher  or  lower  value 
of  the  labor.  Only  in  a  small  degree,  and  exceptionally,  can 
an  adult  worker  make  any  considerable  change  in  the  char- 
acter and  grade  of  his  work.  Only  in  a  small  degree  can  or 
do  young  workers  enter  into  classes  of  occupations  that  are 
higher,  more  skilled,  than  those  of  their  fathers.  Partly  they 
are  prevented  by  lack  of  natural  ability  and  partly  by  ig- 
norance of  opportunities,  and  partly  by  the  difficulties  and 
expense  of  training  and  preparation.  The  change  of  any  one 
worker  from  a  lower  group  to  a  higher  affects  the  value  of  the 
services  of  both  groups  by  reducing  the  supply  of  labor  in 
the  low-paid  and  increasing  the  supply  in  the  higher  paid  oc- 
cupation. Yet  such  changes  as  are  made  always  have  fallen 
far  short  of  leveling  the  value  of  services  in  all  industries 
and  undoubtedly  always  must  do  so. 

This  doctrine  may  be  represented  schematically  by  a  pyra- 


Ch.  19] 


PRINCIPLES  OF  WAGES 


221 


7 

Rare  /Kjt/,f}/ 

S 

6pecio//sfj 

I        ! 
1         > 

W 

yiillee/ 

a       lb       \      c 

7?m/ms 

IF 

UnjMt//et/    fYorMin^    C/ajj 

Fio.  30.    NoN-coMPKTiHa  Classbs. 


k 


mid.  A  young  man  of  cer- 
tain ability  and  under  cer- 
tain conditions  may  be 
able  to  fit  himself  for  any 
one  of  several  occupations, 
a,  b,  or  c  in  class  III. 
After  he  has  mastered  any 
trade  (say  Ilia)  he  may 
be  able  to  advance  (to  class  II)  but  in  most  cases  he 
would  find  it  each  year  increasingly  difficult  to  do  so. 
It  is  however  easier  to  change  on  the  same  plane  than  to 
move  upward,  and  it  is  usually  still  easier  to  go  downward 
than  to  change  on  the  same  plane.  In  the  extreme  cases  the 
value  of  the  labor  of  any  two  non-competing  classes  is  fixed 
as  if  each  class  occupied  a  separate  island,  and  could  not 
change  occupations,  but  could  only  exchange  products  at  the 
ratio  resulting  from  the  reciprocal  bidding  of  the  traders. 
(See  Chapter  7,  section  3.)  The  masses  of  the  workers  in  any 
two  countries  of  different  resources  and  density  of  population, 
such  for  example  as  the  United  States  and  Italy  or  China,  are 
to  a  certain  degree  in  non-competing  classes.  If  immigration 
is  unrestricted  by  law,  all  that  keeps  wages  from  becoming 
identical  for  like  classes  of  workers  (as  carpenters,  painters, 
etc.)  in  the  two  countries  is  the  difficulty  of  migration.^ 

§  9.  Basis  of  the  personal  baxgaining  power  in  the  wage- 
contract.  "We  arrived  at  the  explanation  that  the  price  of 
labor  bought  by  an  employer  must  be  related  to  and  depend 
on  the  value  of  the  services  bought.    "Wages,  just  as  the  prices 

9  This  doctrine  was  given  its  name  by  the  English  economist  J.  E. 
Cairnes  (Some  Leading  Principles  of  Political  Economy,  Newly  Ex- 
pounded, 1874).  As  presented  by  him  the  doctrine  was  given  a  very  dif- 
ferent emphasis,  for  he  supposed  it  to  be  a  rare  and  remarkable  excep- 
tion to  what  he  believed  was  the  general  rule,  that  the  cost-of-production 
regulated  the  price  of  goods, — essentially  a  "labor-theory  of  value."  We 
regard  it  merely  as  a  helpful  way  of  presenting  a  particular  case  of  the 
general  rule  that  the  value  of  agents  is  derived  from  their  products 
when  the  market  is  viewed  as  a  whole. 


222  VALUABLE  HUMAN  SERVICES,  AND  WAGES       [Pt,  III 

of  commodities,  depend  on  the  values  in  the  minds  of  the 
various  traders,  and  these  values  in  turn  are  the  reflection 
of  consumers*  choice.  But  the  personal  element  of  bargain- 
ing between  man  and  man  seems  to  obscure  our  view  of  the 
motives  determining  wages  much  more  than  of  the  motives 
determining  commodity  prices.  If  the  fisher  and  the  miner 
bring  their  products  to  the  general  market,  the  question  upper- 
most is  the  price  the  product  shall  bring,  and  their  labor- 
incomes  are  easily  seen  to  be  the  price  of  the  material  prod- 
ucts (less  certain  costs  and  allowance  for  equipment)  (see 
above,  section  3).  But  if  an  employer  hires  a  number  of 
workmen,  and  the  labor  of  each  becomes  merged  and  lost  to 
view  in  a  complex  product,  what  part  of  this  undivided  prod- 
uct is,  on  value-principles,  imputable  to  the  labor  ?  If  we  lose 
hold  of  a  guiding  principle  of  value,  there  is  danger  that  we 
shall  see  only  the  superficial  fact  of  the  personal  bargain 
between  employer  and  workman.  Sometimes  the  personal 
power  of  the  employer  looms  so  large  that  he  is  thought  to 
* '  pay  whatever  he  pleases, ' '  sometimes  wages  seem  to  depend 
on  the  whim  of  labor  leaders,  sometimes  on  the  monopolistic 
power  of  organized  labor.  This  way  of  viewing  the  problem 
has  even  been  dignified  with  the  name  of  ' '  the  bargain  theory 
of  wages."  Such  a  view  overlooks  the  logical  cause  of  value, 
and  the  network  of  impersonal  forces  which  enwraps  and 
binds  the  personal  bargain.  "What  makes  the  employer 
"please"  to  pay  as  much  as  he  does;  what  is  there  in  the 
economic  situation  that  at  one  time  gives  to  the  labor  leader 
bargaining  power  to  get  an  advance  of  wages,  and  at  another 
time  does  not?  These  are  questions  whose  answers  help  us 
to  go  deeper  into  the  explanation  of  wages. 

The  truth  seems  to  be  that  while  wages  paid  by  an  employer 
result  from  a  bargain,  this  in  turn  rests  on  the  same  causes 
of  value  as  does  the  bargain  for  material  agents  (commodity 
prices,  rents,  as  also  interest  rates),  that  is,  on  the  direct  or 
indirect  effect  of  labor  in  the  gratifying  of  desires.  When 
the  employer  is  producing  goods  to  sell  he  is  acting  as  a  mid- 


Ch.  19]  PRINCIPLES  OF  WAGES  223 

dlemau  between  the  employee  and  the  ultimate  consumers 
whose  desires  combine  to  impart  value  to  the  labor  used.  The 
greater  the  demand  for  labor  services  and  the  more  limited 
the  group  of  laborers  that  can  render  these  services,  the 
greater  is  the  bargaining  power,  and  vice  versa.  Bargaining 
power  is  simply  the  power  to  bring  about  a  true  equilibrimn 
price  inherent  in  the  economic  situation, 

§  10.  Friction  in  the  adjustment  of  wages.  The  con- 
formity of  actual  wages  to  the  true  equilibrium  price  under 
any  given  market  conditions  is  never  complete.  Actual  wages 
may  be  said,  in  somewhat  indefinite  phrase,  to  have  "a  tend- 
ency to  conform,"  to  an  abstract  competitive  price,  meaning 
that  the  most  fundamental  forces  are  always  working  to  that 
end.  These  forces,  however,  are  counteracted  by  many  other 
influences,  some  slight  and  temporary,  and  others  strong  and 
long  continued.  We  do  not  here  refer  to  such  things  as 
monopolistic  power  of  organization  which,  however  artificial 
it  may  seem,  is  a  part  of  the  economic  situation  for  the  time 
and  determines  the  market-price.  We  refer  to  other  condi- 
tions, such  as  the  following. 

The  wage  received  by  any  particular  employee  may  be 
higher  or  lower  than  those  of  other  workers  and  than  the  true 
market-price  as  a  result  of  favoritism,  due  to  friendship,  re- 
lationship, or  bribery,  in  private  employ,  in  corporations,  or 
in  government  service. 

As  a  whole,  the  prices  of  labor  have  more  inertia  and  more 
momentum  than  do  prices  of  material  commodities.  As  the 
prices  of  the  commodities  that  labor  helps  to  produce  go  up 
or  down,  wages  follow  more  slowly.  This  is  true  of  wages 
whether  the  change  is  in  the  general  scale  of  prices  (see  the 
standard  of  deferred  payments  in  Vol.  II)  or  in  the  price 
of  the  particular  class  of  goods.  Habits  of  thought  count  for 
more  in  wages  than  in  most  other  prices.  Caste  and  custom 
are  great  influences  making  for  inertia  of  wages.  The  laborer 
thinks  of  his  labor  as  worth  so  much,  and  in  general  is  slow  to 
ask  more,  and  is  loath  to  take  less  than  he  has  been  getting. 


224  VALUABLE  HTBIAN  SERVICES,  AND  WAGES      [Pt.  III^ 

Combinations  of  workers  may  hasten  the  rise  and  retard  the 
fall  of  the  prevailing  scale  of  wages.  The  adjustment  of 
labor-supply  to  commodity  prices  is  in  large  part  brought 
about,  therefore,  when  prices  of  products  rise,  by  taking  on 
less  capable  workers  at  the  same  wages,  and  by  working  more 
regularly  and  for  more  hours ;  and  when  prices  fall,  by  throw- 
ing the  less  eflScient  workers  out  of  employment,  and  by  work- 
ing fewer  hours.  In  contrast  with  wages,  profits  are  quickly 
adjusted  to  price  changes,  going  up  quickly  when  prices  of 
products  rise,  and  going  down,  often  for  a  time  to  a  minus 
quantity,  when  prices  fall.  (See  later  under  profits  and  en- 
terprise.) 

§  11.  Uniqueness  of  separate  services.  In  many  cases 
the  individual  employee  can  not  get  higher  wages  because  of 
his  immobility.  He  (or  she)  has  a  home,  and  must  live  at 
home,  and  tho  he  may  have  greatly  improved  in  efficiency  in 
the  particular  position,  may  not  be  able  to  accept  positions 
open  elsewhere  at  much  higher  salaries.  He  can  not  sell  his 
labor  in  an  open  market.  Many  positions  of  confidence  and 
trust  are  such  that  it  requires  years  of  experience  to  gain  ef- 
ficiency, yet  that  experience  and  efficiency  pertain  to  that 
particular  job,  and  can  not  be  in  large  part  transferred  else- 
where. In  such  situations  the  employer  may  be  able  to  retain 
this  person,  under  existing  market  conditions,  for  less  than  he 
would  have  to  pay  to  get  some  one  else  to  fill  the  position  sat- 
isfactorily. 

On  the  other  hand  an  employer  often  is  forced  to  pay  a 
higher  wage  to  hold  an  employee  than  on  general  price  con- 
ditions is  warranted,  in  order  to  hold  the  services  that  have 
become  particularly  valuable  to  his  business.  In  many  cases, 
too,  old  employees  are  retained  after  they  could  be  replaced 
by  more  efficient  men  at  the  same  or  lower  salaries.  Services 
are  well-nigh  the  least  standardized  of  all  saleable  things,  and 
in  countless  cases  both  the  laborer  and  his  job  have  more  or 
less  the  character  of  uniqueness;  that  is,  there  is  no  other  job 
exactly  like  this  one  and  no  other  laborer  exactly  suited  for 


Ch.  19]  PRINCIPLES  OF  WAGES  225 

that  particular  work.  These  are  facts  which  must  neither  be 
overlooked  nor  exaggerated  to  the  point  of  obscuring  the  gen- 
eral conformity  of  wages  to  market  conditions. 

§  12.  Labor-incomes  and  wealth-incomes.  The  funda- 
mental principles  of  value  and  price  apply  fully  to  labor,  as 
we  have  said.  (See  above,  Chapter  18,  section  1.)  But  the 
sale  of  the  services  of  human  beings  is  marked  by  important 
conditions — moral,  political,  social,  and  consequently  also  eco- 
nomic— which  distinguish  it  from  the  ordinary  sale  of  material 
wealth.  The  distinction  between  men  and  things  is  from  all 
these  standpoints  both  of  theoretical  and  of  practical  impor- 
tance. It  will  not  do  to  say:  "The  law  of  wages?  Labor  is 
a  commodity,  that  's  all."  Taking  one  point  of  view,  and  see- 
ing only  the  value  element  common  to  all  economic  agents, 
we  may  be  tempted  to  merge  all  in  one  category,  and  to  say 
that  men  also  are  a  form  of  wealth.^"  In  a  democratic  society 
where  there  is  no  chattel  slavery  and  each  worker  must  be 
deemed  to  be  a  free  political  agent,  this  distinction  between 
men  and  things  is  largely  what  gives  political  economy  any 
significance.  In  the  social  applications  of  economics,  wealth 
is  always  but  a  means  to  an  end,  whereas  man  is  both  a  means 
(as  laborer)  and  the  end  itself  (human  welfare). 

Men  and  wealth,  the  two  great  classes  of  economic  agents, 
are  severally  and  in  combination  the  sole  source  of  all  eco- 
nomic incomes.  The  corresponding  classes  of  incomes  are 
labor-incomes   and   wealth-incomes.^^     The    former    of   these 

10  As  has  been  done  by  many  economists.  Very  commonly,  also,  men 
are  spoken  of  in  popular  discussion  as  capital  or  as  wealth — a  very 
questionable   terminology. 

11  See  definition  of  labor-incomes,  ch.  18,  sec.  1.  It  is  well  to  observe 
that  this  term  has,  in  certain  interesting  and  valuable  rural  surveys, 
been  used  in  a  peculiar  and  restricted  sense,  that  of  the  amount  of  clear 
gain  that  a  farmer  may  fairly  attribute  to  his  own  services  (after  mak- 
ing due  allowance  for  the  usual  rate  of  return  on  his  total  Investment) 
in  addition  to  the  personal  usance  of  his  house,  yard,  and  other  wealth 
(horses,  carriages,  etc.)  and  to  all  the  products  of  farm  (food,  fuel,  etc.) 
that  are  consumed  by  himself  and  family.    The  term  as  thus  imder- 


226  VALUABLE  HUMAN  SERVICES,  AND  WAGES      [Pt.  Ill 

makes  a  greater  aggregate  amount,  made  up,  however,  of 
many  incomes,  nearly  all  small.  The  great  majority  of  the 
people  of  any  country  live  mostly  on  labor-incomes,  their  own 
or  from  members  of  their  family.  This  is  true  even  if  all  the 
psychic  incomes  of  persoral  service  for  one's  self  and  family 
be  overlooked,  and  only  the  more  material  forms  of  income, 
such  as  are  ordinarily  regarded  in  income  statistics  (material 
products  and  money  wages)  be  reckoned.  At  the  same  time 
there  is  no  family  so  destitute  that  a  part  of  its  psychic  income 
is  not  obtained  from  the  usufructs  of  durable  wealth  (uses  of 
clothing,  cooking  utensils,  furniture),  and  there  are  millions 
whose  labor-income  in  the  form  of  goods  and  money  is  sup- 
plemented to  a  considerable  degree  by  incomes  from  some 
wealth  or  claim  upon  other  men.  There  are  the  agricultural 
workers,  some  of  them  land  owners  or  partly  land  owners,  and 
nearly  all  of  them  to  some  extent  tool  owners.  There  are 
many  city  dwellers  owning  their  stores  and  manufacturing 
establishments  in  whole  or  in  part,  and  many  more  owning 
houses ;  there  are  in  America  nearly  nine  million  depositors  in 
savings  banks  (many  persons  and  families  being  duplicated). 
Millions  of  other  persons  hold,  through  mortgages,  bonds  and 
shares,  claims  on  real  estate,  small  businesses,  or  on  corpora- 
tions (later  treated  more  fully  under  "capital").  There  are 
the  accumulated  funds  of  insurance  companies,  fraternal 
orders  and  societies,  owned  collectively  by  members  and  policy- 
holders. There  are  the  psychic  incomes  shared  by  the  masses 
of  the  people  in  the  use  of  schools,  museums,  libraries,  build- 
ings and  all  other  enjoyable  public  property.  The  labor  in- 
come is  thus  in  the  case  of  individuals  or  families  but  the  part 
of  income  which  is  due  and  attributable  to  the  valuable  efforts 
they  have  rendered  to  themselves  or  others.  This  form  of  in- 
come stops  when  the  man  dies  or  fails  to  perform  his  work; 
the  income  from  wealth  goes  on.     Thus  families  with  equal 

stood  is  of  course  unsuitable  for  a  more  general  economic  application, 
and  even  in  its  special  use,  it  unfortunately  opens  the  way  to  some  mis- 
understanding of  the  results  of  the  surveys. 


Ch.  19]  PRINCIPLES  OF  WAGES  227 

incomes  may  receive  them  from  sources  of  very  different  sta- 
bility and  duration. 

§  13.  The  wage  system.  A  large  part  of  the  labor-incomes 
in  society  as  it  is  at  present  are  received  in  the  form  of  wages. 
Indeed  our  present  economic  organization  is  often  called  "the 
-wage  system. ' '  By  this  is  meant :  an  organization  of  industry 
wherein  some  men,  in  control  of  the  material  agents,  buy  at 
their  competitive  price  the  labor  of  other  men.  The  wage  sys- 
tem implies  a  contract  between  employer  and  employed.  The 
relation  or  bond  between  them  is  that  of  a  wage  payment, 
either  in  money  or  in  kind.  The  wage  system  is  a  method  of 
organization  never  found  completely  realized.  A  community 
made  up  entirely  of  independent  small  farmers,  living  each 
on  his  little  patch  of  ground,  could  not  have  any  essential 
feature  of  the  wage  system.  Wherever  are  found  considerable 
numbers  of  independent  small  farmers  and  other  self-employ- 
ing laborers,  as  is  everywhere  in  large  measure  the  case,  the 
wage  system  does  not  exist  in  complete  form.^^  Some  men 
with  more  or  less  wealth  in  every  community  are  working  for 
wages,  while  others  are  independent  producers  and  are  their 
own  employers.  Society  is  not  sharply  divided  into  two 
classes,  one  controlling  all  the  material  equipment,  the  other 
with  only  their  bare  labor  to  sell.  The  wage  system  may  be 
spoken  of  as  prevailing  to-day  not  as  the  exclusive,  but  as  the 
typical,  dominant,  and  slowly  increasing  form  of  industrial 
organization,  while  side  by  side  or  along  with  it  is  found  in- 
dependent production. 

§  14.  Wages  and  the  general  economic  situation.  Our 
statement  of  the  theory  of  wages  has  now   been   brought 

12  In  fact,  of  all  those  over  10  years  old  engaged  in  agriculture, 
forestry,  and  animal  husbandry  (in  1910,  a  total  of  about  12,700,000 
persons)  about  one  half  were  operating  owners,  one  fourth  were  labor- 
ers on  the  home  farm,  and  only  one  fourth  were  farm  laborers  "work- 
ing out,"  that  is,  for  wages  outside  the  family.  In  manufactures, 
however,  wage-workers  average  25  per  establishment;  and  in  mining 
and  in  transportation  the  average  proportion  of  wage-workers  to  en- 
terprises is  much  larger. 


228  VALUABLE  HUMAN  SERVICES,  AND  WAGES      [Pt.  Ill 

to  a  provisional  stopping  point.  But  the  reader  should  be 
aware  of  the  limitations  of  our  treatment.  We  have  outlined 
a  theory  of  wages  assuming  a  certain  economic  situation;  we 
have  passed  in  review  the  various  motives  and  characteristics 
of  men  which  help  to  explain  the  ratio  in  which  the  various 
kinds  of  services  are  valued  in  terms  of  each  other.  While  we 
have  recognized  the  presence  and  effect  of  material  resources 
and  of  manifold  instrumental  goods  as  being  indispensable 
to  the  use  of  labor,  we  have  said  little  of  the  effects  that 
changes  in  their  amount  would  have  on  the  whole  economic 
situation.  We  have,  in  other  words,  outlined  only  a  static  (or 
equilibrium)  theory  of  labor-incomes,  and  not  a  dynamic 
theory. 

But  the  level  of  the  general  scale  of  wages  is  a  part  of  a  gen- 
eral economic  situation  and  is  dependent  on  the  relation  of 
population  to  all  material  resources,  artificial  and  natural,  on 
the  progress  of  education,  of  science,  and  of  the  industrial 
arts,  and  on  many  other  factors.  The  foregoing  theory  of 
wages  therefore  is  only  provisional,  not  that  it  must  be  es- 
sentially changed,  but  that  it  must  later  be  materially  en- 
larged and  completed.  The  study  of  the  value  of  labor  is  not 
a  thing  apart  from  that  of  the  value  of  other  agents.  Each 
succeeding  chapter  from  this  point  on  will  supplement  the 
foregoing  treatment  of  labor  and  wages.  Especially  in  the  last 
part  of  this  volume  (Chapters  32-39)  will  be  discussed  the 
great  underlying  conditions  on  which  depends  the  general  eco- 
nomic situation  in  which  and  by  which  the  level  of  labor-in- 
comes is  determined. 

Notes 
The  labor-theory  of  value.  Things  go  thus  in  the  real  world,  however 
the  student  or  the  generous-minded  social  reformer  at  times  may  be 
tempted  to  shut  his  eyes  to  the  truth,  feeling  that  value  ought  to  be  in 
proportion  to  labor-time  or  to  the  unpleasantness  of  labor.  There  is  a 
close  correspondence,  even  identity,  between  the  value  of  the  goods  and 
the  value  of  the  labor  that  produced  them,  but  it  is  the  value  of  the  goods 
that  is  reflected  to  the  labor,  and  not  the  reverse.  For,  if  labor  having 
a  high  value  reflected  from  one  product  be  applied  to  another  product 


Ch.  19]  PRINCIPLES  OF  WAGES  229 

that  has  a  low  value,  the  value  of  that  labor  is  in  so  far  thrown  away. 
As  we  saw,  the  values  of  goods  resulting  from  equal  labor-time  of  an  iso- 
lated laborer  are  often  unequal;  and  a  fortiori  the  values  of  equal  labor- 
times  are  sure  to  be  still  more  unequal  when  the  products  result  from 
tlie  labor  of  different  men  of  varied  abilities  and  natures,  trading  in 
a  community.  There  is  therefore  no  unit  of  labor-time  which  can  serve 
as  a  standard  of  the  values  of  goods  or  which  is  embodied  in  equal 
proportions  in  goods  of  equal  value.  Rather,  it  appears  that  labor 
services  are  compared  as  to  value  only  through  the  values  they  derive 
from  their  products.  We  thus  speak  of  equal  quantities  of  labor  not 
as  equal  in  time,  but  as  equal  in  value,  as  so  many  dollars'  worth. 

It  would  be  unnecessary  to  dwell  on  this  truth  were  it  not  for  the 
very  common  illusion  that  labor  may  be  taken  as  the  standard  of 
value,  and  were  it  not  for  the  frequent  recurrence  of  the  fallacious  idea 
that  goods  in  a  market  embody  so-called  labor-units  in  exact  proportion 
to  their  values. 

This  idea  that  the  value  of  goods  is  determined  and  measured  by  the 
quantity  of  labor  put  into  them,  is  the  "labor-theory  of  value"  (not 
to  be  confused  with  the  theory  of  the  value  of  labor).  It  assumes 
that  there  is  such  a  thing  as  a  common  standard  imit  of  labor,  a  definite 
quantum,  measurable  antecedent  to  the  value  of  the  products.  The 
labor-theory  of  value  appears  in  manifold  disguises  both  in  popular  doc- 
trines and  in  systematic  treatises  on  economics.  The  error  in  the  theory 
is  evident,  first,  because  various  kinds  of  labor  differ  in  quality  (or 
kind)  not  merely  in  quantity  (or  time)  and,  in  truth,  it  is  only  through 
tlie  values  of  their  products  that  the  different  qualities  of  labor  can 
be  compared  (singing  with  wood -chopping)  ;  secondly,  because  the  values 
of  goods  differ  not  only  with  the  labor  applied  (even  if  it  were  all 
of  one  quality)  but  with  the  amount  of  complementary  agents  used; 
thirdly,  because  of  the  differences  in  time  elapsing  between  the  application 
of  labor,  and  tho  ultimate  valuable  results  of  the  productive  process. 
(Of  this  more  below,  under  time- value.) 

Various  methods  of  remuneration.  Many  methods  are  employed 
to  measure  the  services  of  wage  workers,  the  main  ones  being  by  time 
and  by  the  piece.  In  time  work  (by  the  hour,  day,  week,  month,  or 
year)  a  general  average  output  is  assumed,  and  the  workman  must  come 
up  to  that  standard  if  he  is  to  hold  his  place.  In  piece  work,  the  price 
per  piece  must  be  enough  to  make  possible  the  prevailing  time  wage 
to  workers  of  that  grade  if  the  supply  is  to  be  maintained  in  that  in- 
dustry. The  piece  price  method  is  combined  with  time  work,  and  is 
varied  in  many  ways  by  giving  premiums  or  bonuses  for  larger  out- 
puts within  a  given  period.  The  conveniences  of  the  different  methods 
of  payment  vary  from  industry  to  industry,  and  even  from  task  to 


230  VALUABLE  HUMAN  SERVICES,  AND  WAGES      [Pt.  Ill 

task  within  the  same  factory,  so  that  now  one,  now  another  method 
is  followed.  In  any  case,  however,  the  aim  is  to  find  some  convenient 
unit  of  service  for  the  measurement  of  the  amount  of  labor  to  be  paid 
for,  and  to  give  a  motive  for  efficiency  to  the  worker.  The  wages  paid  by 
the  various  methods  of  remuneration — as  by  time,  by  the  piece,  by  pre- 
mium for  output — all  conform  in  a  general  way  to  the  value  of  the 
service  imputed  through  bidders  in  the  market. 

Real  wages  in  Europe  and  America.  Bearing  in  mind  the  limitations 
mentioned  in  sec.  7,  the  results  of  a  study  made  by  the  British 
Board  of  Trade  as  to  the  conditions  of  the  working  classes  in  the 
cities  of  five  different  countries  (about  the  years  1908-11)  are  here 
given.  The  further  caution  must  be  given  that  only  certain  groups  of 
trades  were  investigated,  those  in  building,  engineering,  and  printing; 
and  that  the  cost  of  living  was  taken  only  for  food  and  rent  ( figures 
of  rent  here  given  are  the  average  for  two  to  six  room  apartments). 
The  cost  of  living  is  calculated  by  assuming  that  food  cost  represents 
half  of  the  cost  of  living  and  rent  the  other  half.  In  fact  food  consti- 
tutes something  less  than  half,  rent  only  about  one  fifth;  but  it  will 
be  observed  that  rents  vary  pretty  closely  in  accord  with  money  wages, 
and  that  the  cost  of  things  bought  with  the  rest  of  wages,  after  pay- 
ing for  food  and  rent,  consists  very  largely  of  the  cost  of  labor.  The 
figures  are  merely  proportional  (taking  England  as  a  base)  and  do  not 
express  any  particular  unit  of  money. 

Real  Real 

wages  wages 

Money        Food         Rent        Cost  of     England  U.  S.  as 

wages          cost                           living        as  base  base 

United  States. .  232             138            225             182             128  100 

England   100             100             100            100             100  78 

France    75               99               81               90               83  65 

Belgium   63               99               62               81               78  61 

Germany    83            117               99            108              77  60 

Tlie  indication  is  that  money  wages  in  the  United  States  were  from 
about  two  and  a  third  times  to  nearly  four  times  as  high  as  those  of 
other  countries;  but  that  the  workingman's  cost  of  living  was  from 
nearly  two  to  two  and  a  third  times  as  high  in  the  United  States.  As 
a  result  the  day's  wage  in  the  other  countries  would  buy  from  40  to 
22  per  cent  less  than  it  would  in  the  United  States. 

In  considering  these  statistics  it  must  be  remembered  that  the  wages 
in  skilled  trades  (such  as  those  here  included)  are  higher  relatively 
in  the  United  States  than  are  the  wages  of  unskilled  labor  (especially 
in  Germany)  and  also  that  far  better  provision  had  at  that  time  been 
made  in  the  continental  countries  of  Europe  than  in  either  England  or 


Ch.  19]  PRINCIPLES  OF  WAGES  231 

the  United  States  for  insurance  against  sickness,  accident,  old  age  pen- 
sions, etc. 

Value  versus  utility  of  labor.  Observe  that  all  our  discussion  here 
has  related  to  the  value  and  not  to  the  utility  of  labor.  The  explana- 
tion of  value  is  found  in  the  desires  and  choices  of  men,  with  all  their 
folly  and  blunders  of  judgment.  More  often  perhaps  in  the  case  of 
human  services  than  elsewhere,  value  is  found  to  be  in  conflict  with  util- 
ity, properly  conceived  (see  ch.  3,  sec.  4)  and  properly  estimated.  Many 
of  the  kinds  of  labor  that  are  indispensable  to  the  very  existence  of 
men  have  small  value  (e.g.,  common  labor  used  in  producing  food, 
clothing,  shelter,  protection  from  the  elements,  for  the  rescue  or 
preservation  of  human  lives).  The  qualities  needed  in  such  work  vary 
from  man  to  man  it  is  true,  but  they  are  common,  found  in  large 
measure  in  nearly  all  men.  Such  callings  require  merely  the  physical 
strength  that  most  men  have,  a  modicum  of  intelligence  to  understand 
and  obey  orders,  and  the  moderate  degree  of  skill  that  can  be  acquired 
by  brief  practice.  Almost  every  one  (unless  weakened  by  years  of 
sedentary,  non-physical  occupation)  can,  in  case  of  need,  take  up  such 
work  at  once.  Labor  thus  plentiful  in  relation  to  the  demand  whether 
it  be  used  for  useful  ends  (such  as  flowers  or  food)  or  for  harmful 
ends  (such  as  opium  made  from  flowers  or  whisky  made  from  corn) 
bears  a  low  value. 

On  the  other  hand  it  is  the  getting  out  of  such  an  occupation,  not 
the  getting  into  it,  that  requires  a  little  more  than  commonplace 
intelligence,  forethought  by  one's  self  or  by  one's  parents,  persistence, 
and  other  qualities.  The  serious  lack  of  any  one  of  these  disqualifies 
for  most  occupations  that  yield  large  labor-incomes.  Many  of  the  serv- 
ices valued  highly  are  of  a  sort  distinctly  not  of  utility.  Some  services 
are  highly  rewarded  for  gratifying  the  esthetic  tastes  of  a  few  (luxuri- 
ous decorations,  operatic  singing,  epicurean  tastes  in  food,  etc.),  others 
for  pandering  to  the  vices  of  the  many  (drinking,  gambling,  licentious- 
ness). But  always  the  value  is  set  and  the  price  is  paid  by  some  one 
or  more  buyers  who  choose  such  services  at  the  higher  value  in  prefer- 
ence to  lower  valued  services  having  true  utility  for  themselves  and  for 
society.  Here  as  elsewhere  it  is  true  that  forces  are  always  at  work 
to  keep  value  in  some  measure  of  accord  with  utility  in  the  world  as 
a  whole  and  in  the  long  run. 


PART  IV 
TIME-VALUE  AND  INTEREST 


CHAPTER  20 
TIME-PREFERENCE 

§  1.  Time  aa  a  condition  in  valuation.  §  2.  Tlie  time  element  in  man's 
provision  for  his  needs.  §  3.  Cases  where  future  use  is  preferred. 
§  4.  Cases  where  present  use  is  preferred.  §  5.  Biologic  basis  for  most 
choice  of  present  use.  §  G.  Hope  and  risk  as  aflfecting  time-preference. 
§  7.  Hastening  the  ripening  process.  §  8.  Post])oning  the  use  and  the 
readiness  for  use.  §  9.  Pliysical  change  accompanying  time-change. 
Note  on  Present  and  future  goods,  uses,  desires. 

§  1.  Time  as  a  condition  in  valuation.  Let  us  recall  here 
that  every  object  of  choice  is  characterized,  or  qualified,  in 
some  way  with  reference  to  its  stuff,  form,  place,  and  time; 
and  according  as  our  attention  is  directed  toward  the  one  or 
the  other  quality  we  speak  of  the  stuff-,  form-,  place-,  and  time- 
value.     Time-value  now  calls  for  fuller  consideration. 

The  luscious  fruit  on  the  table  makes  a  certain  appeal  to 
us,  is  valued,  as  compared  with  anything  else.  Why?  Partly 
because  of  the  physical  and  chemical  elements  of  which  it  is 
composed,  partly  because  of  the  particular  form  in  which  those 
elements  are  combined,  partly  because  the  fruit  is  close  at 
hand  rather  than  in  some  distant  place,  and  finally  because 
it  is  available  at  the  present  moment  rather  than  at  some 
future  time. 

The  man  who  is  suffering  the  pangs  of  starvation  desires 
food,  and  he  desires  it  at  once.  The  promise  of  a  good  meal 
at  some  time  in  the  distant  future  makes  no  appeal  to  him. 
In  great  extremity  he  will  pay  for  food  any  price  within  his 
power.  "All  that  a  man  hath  will  he  give  for  his  life."  A 
loaf  of  bread  put  into  his  hands  at  the  present  moment  would 

235 


236  TIME-VALUE  AND  INTEREST  [Pt.  IV 

mean  more  to  him  than  the  promise  of  a  whole  bakery  a  year 
from  now.  A  grasping  person,  willing  to  take  advantage  of 
him,  might  get  from  him  a  promise  to  pay  almost  any  sum  in 
the  future  for  present  bread.  He  might  agree  to  pay  back  at 
the  end  of  a  year  five  loaves,  or  ten  loaves,  or  almost  any  num- 
ber of  loaves  in  return  for  the  single  loaf  now  which  will  save 
his  life. 

We  are  dealing  here  with  a  case  of  time-preference.  The 
food  is  preferred  at  one  time  rather  than  another,  in  this  case 
at  present  rather  than  in  the  future.  An  extreme  case  has 
been  cited  for  purposes  of  illustration,  but  it  is  possible  every 
day  and  almost  every  hour  to  observe  cases  involving  the  same 
kind  of  preference,  that  for  present  goods  as  compared  with 
an  equal  amount  of  like  future  goods,  and  other  cases  where 
like  goods  are  preferred  in  the  future  rather  than  at  present. 
In  every  conjuncture  of  human  life,  the  timeliness  of  goods  is 
an  ever  present  factor  in  their  valuation,  and  often  it  is  of 
the  very  greatest  significance.  The  demands  of  consumers 
always  have  reference  to  a  particular  time,  and  the  business 
man  is  always  seeking  to  supply  goods  at  the  right  time  as  well 
as  of  the  right  stuff  and  form  and  in  the  right  place.  Palm- 
leaf  fans  are  not  marketed  in  winter  time,  nor  overcoats  and 
furs  in  summer.  The  promissory  note  must  be  paid  when  due. 
The  bond  has  a  greater  value  just  before  an  interest  payment 
than  just  after.  And  from  these  limitations  of  time,  as  from 
those  of  space,  there  is  no  escape.  A  man  can  not  be  in  two 
places  at  once,  nor  can  he  command  the  sun  to  stand  still  and 
halt  the  passage  of  time. 

§  2.  The  time  element  in  man's  provision  for  his  needs. 
If  the  needs  of  men  were  supplied  from  day  to  day  by  some 
outside  agency,  if  the  things  we  need  fell  like  manna  from 
the  skies,  or  if  man  lived  the  uncalculating  life  of  some  ani- 
mals, there  would  be  no  such  thing  as  time-preference  or  time- 
value.  The  lowest  animals  live  entirely  in  the  present.  Their 
whole  activity  consists  in  appropriating  whatever  agreeable 
things,  or  rejecting  whatever  disagreeable  things,  are  at  the  mo- 


I 


Ch.  20]  TIME-PKEFERENCE  237 

ment  within  their  reach. ^  And  with  few  exceptions  even  the 
higher  animals  live  very  largely  from  day  to  day,  as  did  primi- 
tive men  and  as  some  men  do  still  in  the  midst  of  modern 
civilization.  For  these  the  desires  of  the  present  engross  al- 
most the  entire  attention. 

But  even  some  of  the  animals  are  guided  by  their  feeble 
intelligence  or  by  instinct  to  make  choices  that  do  involve 
a  relation  between  goods  in  the  present  and  in  the  future. 
Squirrels,  bees,  and  ants  store  up  in  the  season  of  superfluity 
for  the  season  of  scarcity.  Man,  and  especially  civilized  man, 
in  a  far  greater  measure,  takes  the  future  into  account  in 
his  plans,  his  calculations,  and  his  labors.  He  lives  his  eco- 
nomic life  of  choice,  so  to  speak,  both  in  the  present  and  in 
the  future.  His  economic  life  and  his  economic  judgment 
comprehend  a  great  number  of  periods  at  once.  He  attempts 
to  provide  for  the  needs  of  the  future  almost  as  carefully  as 
for  those  of  the  present.  This  means  a  much  more  compli- 
cated adjustment  of  goods  to  desires.  The  typical  animal- 
choice  is  lacking  the  time-dimension  (the  objects  and  uses  are 
synchronous).  The  typical  human  choice  is  between  goods  in 
different  periods  (the  objects  and  uses  are  non-synchronous).^ 

§  3.  Cases  where  future  use  is  preferred.  It  should, 
however,  be  carefully  observed  that  time-preference  is  not 
always  preference  for  present  goods  as  compared  with  future 
goods.  We  sometimes,  indeed  very  frequently,  prefer  to  have 
certain  things  in  the  future.  After  any  meal,  the  present  use 
of  the  remaining  food  in  the  pantry,  the  cellar,  the  granary, 
is  worth  less  than  its  possibility  of  future  uses,  some  of  which 
are  a  few  hours,  others  a  few  days,  others  perhaps  weeks 
distant.  (See  above.  Chapter  4,  section  6  and  section  7). 
The  changes  of  the  seasons  with  their  effects  on  the  abundance 

1  Agreeable  or  disagreeable  mean  here  only  so  in  accord  with  (in 
agreement  with)  the  nervous  organization  (or  vice  versa)  that  the 
animal  reaches  out  toward,  or  withdraws  from,  the  object. 

2  See  note  on  "Present  and  future  goods,  uses,  desires,"  at  end  of 
chapter. 


238  TIME-VALUE  AND  INTEREST  [Pt.  IV 

of  plant  and  animal  life  cause  a  pretty  regular  cycle  of  valua- 
tions. When  the  crops  are  harvested  in  the  fall,  the  farmer, 
while  setting  apart  some  of  the  fruits  of  the  field  to  provide 
for  the  present  nourishment  of  himself  and  family,  yet  stores 
up  the  rest  for  later  use.  His  immediate  needs  are  over- 
supplied,  and  his  anticipated  future  needs  induce  him  to  save. 
In  a  fishing  tribe  after  a  great  haul  of  fish  a  present  fish  is 
worth  less  than  the  certainty  of  a  fish  six  months  later  when 
fish  will  be  scarce.  After  a  successful  buffalo  hunt,  when 
all  the  members  of  the  tribe  are  sated  with  meat,  present  meat 
is  worth  less  than  the  chance  of  an  equal  amount  of  meat  any 
time  for  nearly  a  year.  Ice  has  less  value  in  winter  both 
because  the  need  for  ice  in  refrigerators  is  less,  and  because 
ice  is  more  plentiful.  In  January  one  would  gladly  exchange 
a  larger  amount  of  present  ice  for  a  smaller  amount  to  be  de- 
livered the  following  July.  Crops  of  fruit,  vegetables,  etc., 
are  on  the  average  worth  less  per  unit  at  the  moment  they  are 
gathered  than  at  any  other  time  in  the  year  until  the  next 
crop  is  due.  Coal  and  wood  are  worth  somewhat  less  in  spring 
and  summer  than  in  the  following  winter.  Fresh  eggs  in  the 
months  of  April  and  May  when  most  plentiful  could  hardly 
be  exchanged  for  half  the  quantity  to  be  delivered  in  Novem- 
ber and  December, — despite  the  attempts  to  keep  them  over 
and  thus  equalize  conditions  and  values  by  cold-storage  and 
preserving  in  enormous  quantities. 

Such  seasonal  changes  within  the  year  comprise  a  large 
proportion  of  the  cases  in  which  present  uses  are  worth  less 
than  future  uses.  The  present  values  of  most  goods  as  antici- 
pated through  a  series  of  years  are  adjusted  to  a  pretty  reg- 
ular scale.  So  far  as  men  can  see  in  advance,  one  year  is 
going  to  be  much  like  another.  Differences  can  be  allowed  for 
on  the  average,  but  no  one  knows  just  when  the  greater  crop 
or  the  crop  failure  is  to  occur.  So  all  must  be  estimated  in 
advance  in  relation  to  the  average,  or  normal.^ 

8  But  see  ch.  21,  sec.  7,  for  examples  of  individual  differences  in  esti- 
mates. 


Ch.  20]  TIME-PREFERENCE  239 

The  preference  for  future  over  present  use  appears  in 
many  other  relations  of  life.  A  fire-engine  is  less  valuable 
now  than  it  will  be  when  the  fire  breaks  out ;  indeed  its  present 
value  is  but  a  diminished  reflection  of  the  value  we  anticipate 
it  will  then  have.  We  would  gladly  exchange  the  useless  en- 
gine now,  with  the  trouble  and  expense  of  care  it  involves,  for 
the  certainty  of  a  similar  engine  when  the  fire  occurs.  In  like 
manner  a  warship  is  less  valuable  now  than  is  the  prospect 
of  its  use  when  war  occurs.  The  gift  of  a  trip  to  Europe  this 
year  is  less  welcome  when  one  is  unable  to  go  than  would  have 
been  the  promise  of  a  trip  for  next  year  when  one  expects  a 
vacation.  In  countless  cases  may  be  heard  the  words,  "I 
don't  care  for  it  just  now,"  or  ''If  only  it  had  been  later." * 

§  4.  Cases  where  present  use  is  preferred.  But  with  all 
his  foresight,  and  with  all  his  appreciation  of  future  needs, 
even  the  most  provident  of  men  is,  like  the  animals,  com- 
pelled to  live  very  largely  in  the  present.  There  is  no  such 
thing  as  a  future  desire;  there  are  only  present  desires  for 
either  present  or  future  goods.  The  needs  of  the  present  and 
the  desires  for  present  goods  are,  in  much  the  larger  number 
of  cases,  the  more  insistent.  It  is  not  rational  (or  even  pos- 
sible) to  provide  for  the  future  until  a  certain  minimum  pro- 
vision, at  least,  is  made  for  the  present.  The  typical  or  aver- 
age preference  of  men  is  for  present  goods  or  uses.  This  does 
not  mean,  of  course,  that  there  is  not  desire  for  future  goods, 
but  simply  that  a  larger  quantity  of  future  goods  will  ex- 
change for  a  smaller  quantity  of  present  goods.  The  smaller 
amount  of  present  goods  is  regarded  as  worth  as  much  as  the 

*Thi8  proposition  that  present  goods  of  specific  kinds  are  often 
valued  less  than  the  prospect  of  like  goods  later  has  been  so  strongly 
emphasized  here  because  a  different  statement  is  often  met  in  economic 
writings,  namely,  that  present  goods  are  always  worth  more  than  future 
goods  of  like  kind  and  quantity.  The  erroneous  idea  results  from  think- 
ing in  terms  of  money,  the  loan  of  which  in  a  developed  money  economy 
comes  to  command  a  general  prevailing  premium,  to  which  the  prices 
of  other  goods  are  adjusted.  But  a  piece  of  money  itself  may  be 
worth  less  now  than  later. 


240  TIME-VALUE  AND  INTEREST  [Pt.  IV 

larger  amount  of  future  goods.  There  are  numberless  illus- 
trations of  this  type  of  preference.  In  the  various  cases  men- 
tioned in  the  preceding  paragraph  one  would  need  merely  to 
shift  his  position  in  point  of  time  to  reverse  the  order  of  pref- 
erence. In  the  summer  a  quantity  of  present  ice  is  valued 
more  than  the  certainty  of  the  same  amount  the  next  winter ; 
in  the  winter  present  eggs  are  valued  more  than  the  trust- 
worthy promise  of  an  equal  number  the  next  spring.  So 
with  fruits  and  grains  just  before  the  new  crop  matures,  the 
fire-engine  when  the  conflagration  is  under  way,  the  battle- 
ship when  the  war  has  begun. 

§  5.  Biologic  basis  for  most  choice  of  present  use.  The 
different  time-periods,  present  and  future,  and  their  different 
economic  situations  are  brought  into  comparison  either  by  in- 
stinctive choice  (necessarily  involving  a  ratio  of  comparison), 
or  by  conscious  choice  between  the  thing  actually  present  and 
the  future  good  more  or  less  clearly  pictured  in  the  imagina- 
tion. To  take  and  enjoy  things  as  soon  as  the  desire  arises 
and  the  means  are  present  seems  to  be  a  fundamental  trait  of 
men.  The  impulse  to  seek  immediate  gratification  is  rooted 
deep  in  man's  biologic  nature.  It  is  found  in  the  most  ele- 
mentary forms  of  animal  life  (see  Chapter  2,  sections  1  and  2) 
and  continues  to  be  a  powerful  guide  to  action  as  higher  forms 
of  life  evolve.  It  has  in  the  course  of  evolution  been  only 
slowly  modified  and  supplemented  by  inhibiting  instincts  and 
by  reason.  This  impulse  is  still  dominant  in  the  actions  of  most 
men,  and  is  ever  ready  to  reassert  itself  under  unusual  temp- 
tations even  in  prudent  natures.  With  children  and  savages 
and  with  many  civilized  men  the  voluntary  postponement  of 
the  gratification  of  desire  is  of  very  limited  character. 
Powerful  and  universal  impulses  work  in  favor  of  present 
gratification ;  man 's  provision  for  the  future  occurs  only  when 
imagination,  reason,  habit  due  to  long  training,  and  a  strong 
will  to  pursue  a  distant  object  hold  these  impulses  in  eheck.^ 

5  It  is  true  that  in  the  social  insects  (bees  and  ants)  and  occasionally 
among  some  higher  animals   (squirrels),  the  storing  of  food  is  an  act 


Ch.  20]  TIME-PREFERENCE  241 

§  6.  Hope  and  risk  as  affecting  time-preference.  Hope 
is  a  blessed  gift  to  man  to  help  him  bear  the  ills  of  life,  but 
hope  does  not  always  operate  with  great  discrimination. 
Hope  of  future  provision  for  future  needs  encourages  the 
present  use  of  goods,  leaving  the  future  to  care  for  itself.  As 
the  successive  years  will  bring  recurring  needs,  they  will, 
while  health  and  strength  continue,  bring  also  recurring  sup- 
plies of  goods.  If  this  were  the  unbroken  rule  of  life,  the 
most  economic  use  of  goods  would  be  to  consume  each  year's 
products  as  they  come.  This,  indeed,  is  the  firmly  fixed  habit 
of  life  of  a  large  portion  of  humanity,  even  under  conditions 
where  the  results  are  clearly  bad.  In  many  provident  and 
well-to-do  families  there  are  persons  who  are  so  sheltered  from 
responsibility  in  caring  for  the  future,  that  they  bliadly  trust 
that  good  things  will  continue  to  come  in  unlimited  quantities. 
Like  the  young  robin  with  open  mouth,  ever  eager  to  be  fed, 
they  accept  unthinkingly  the  sacrifices  of  others.  Business 
reverses,  the  illness  or  the  death  of  the  responsible  member  of 
the  family,  often  leave  all  unprovided  for,  those  in  whom 
prodigality  has  thus  grown  into  a  habit. 

The  uncertainty  of  life  likewise  strengthens  the  preference 
for  present  over  future  goods.  There  are  two  possibilities  of 
loss  by  waiting,  one  that  the  future  goods  may  not  be  there 
("A  bird  in  the  hand  is  worth  two  in  the  bush"),  and  the 
other  that  one  may  not  be  there  himself  to  enjoy  them. 
C'Eat,  drink  and  be  merry,  for  to-morrow  we  die.")  Life 
itself  is  uncertain,  all  but  the  present  moment.  Each  of  these 
risks  involves  a  discount  on  the  future  uses  as  compared  with 
the  present.  So  large  is  this  uncertainty  of  life  among  sav- 
ages, so  many  die  of  accidents  and  wounds,  that  many  tribes 
are  said  to  have  only  the  vaguest  conception  of  a  natural 

of  instinctive  choice  and  is  continued  even  in  circumstances  where 
the  least  forethought  would  show  the  futility  of  the  process.  But  in 
man  this  choice  seems  to  be  possible  only  by  the  aid  of  forethought 
and  reason,  or  of  habit  acquired  by  the  individual  through  the  earlier 
exercise  of  these  faculties. 


242  TIME-VALUE  AND  INTEREST  [Pt.  IV 

death.  In  semi-civilized  and  in  rude  pioneer  days,  it  was  al- 
most the  rule  to  "die  with  one's  boots  on,"  Even  in  the  most 
regular  order  of  things,  to-day's  desires  have  the  strongest 
claims  of  any  desires  in  one's  life,  simply  because  they  are 
the  most  certain. 

In  the  best  ordered  plans  there  is  some  bad  judgment. 
With  most  men  this  is  increased  by  the  prevalent  under-esti- 
mate  of  the  future  and  by  the  ever  pressing  temptations  of 
present  desires  as  compared  with  the  weakness  of  the  appeal 
of  the  future.  The  steady  pressure  of  these  motives  directs  the 
larger  part  of  the  efforts  and  thought  of  men  toward  the  pro- 
viding of  present  goods,  often  leaving  the  future  (ever  becom- 
ing the  present)  unprovided  for.  Accident,  robbery,  fire, 
storm,  war,  disease,  death,  countless  mishaps,  may  bring  upon 
any  man,  family,  or  community  this  maladjustment.  Wher- 
ever any  particular  kinds  of  goods  become  in  this  way  un- 
usually scarce,  they  rise  in  value  compared  with  future  goods 
of  like  kind  and  quantity.  Time-preference  appears,  and 
shows  itself  in  the  uses  made  of  all  existing  economic  agents, 
both  objective  and  human. 

§  7.  Hastening  the  ripening  process.  A  man  or  a  family 
in  an  isolated  economy  would,  when  in  urgent  need,  make 
efforts  to  convert  future  goods  if  possible  into  present  goods. 
Sometimes  this  can  not  be  done,  e.g.,  the  starving  man  in  the 
forest  can  not  hasten  the  ripening  of  wild  fruits,  and  the  des- 
perate Richard  III  cries  in  vain,  *'My  kingdom  for  a  horse." 
But  in  many  other  cases  there  are  ways  of  converting  future 
into  present  goods,  tho  rarely  without  making  some  sacrifice 
for  the  conversion.  (For  if  they  were  indeed  available  at 
once  they  would  be  present  goods.  )^ 

Future  goods  of  one  quality  may  often  be  appropriated  as 
present  goods  of  a  lower  quality,  e.g.,  the  future  ripe  apple 
is  a  present  green  apple,  the  future  matured  wine  is  the 
present  grape  juice,  the  future  seasoned  lumber  is  present 

«  Review  ch.  10,  sec.  4,  on  the  use  of  indirect  agents  for  hastening 
the  uses  of  goods. 


Cil.  20]  TIME-PREFERENCE  243 

green  lumber.  In  thousands  of  artificial  ways  in  modern  in- 
dustry the  time  needed  for  acquiring  the  better  physical  qual- 
ity and  the  higher  value,  is  cut  short.  In  times  of  siege  and 
famine,  goods  may  be  changed  entirely  from  their  usual  pur- 
poses; trees  are  dug  up  that  the  roots  may  be  eaten,  and 
leather  is  chewed  for  food.  Again,  future  goods  may  be  has- 
tened into  becoming  present  goods  of  nearly  the  same  quality 
by  being  put  through  technical  processes,  e.g.,  the  lumber  may 
be  kiln-dried,  the  fruit  may  be  forced  in  a  hothouse;  but  as 
in  this  process  other  agents  must  be  used,  the  present  goods 
and  the  future  goods  are  somewhat  different  groups  of  things 
presented  to  choice.  Again,  to  get  more  present  goods  the 
usual  care  of  durable  agents  may  be  neglected  and  their  future 
uses  destroyed  by  taking  more  than  the  true  present  usufruct, 
as  by  using  up  a  farm,  or  by  driving  a  horse  to  death  in  go- 
ing for  a  doctor,  or  by  burning  Indian  corn  or  fruit  trees  for 
firewood. 

In  all  these  ways  the  adjustment  of  choice  between  present 
and  future  goods  in  the  individual  economy  is  constantly 
going  on,  reflecting  a  prevailing  time-preference  in  some  per- 
son's mind.  It  will  be  noted  that  in  every  case  this  adjust- 
ment, even  when  made  quite  outside  of  a  market  and  without 
exchange  with  other  persons,  requires  a  sacrifice  of  something, 
either  in  quality  or  in  quantity,  either  in  valuable  labor  or  in 
materials  taken  from  other  uses.  This  sacrifice  bears  some 
value-ratio,  more  or  less  clear,  to  the  time-value  of  the  present 
good. 

§  8.  Postponing'  the  use  and  the  readiness  for  use.  If  on 
the  other  hand  there  is  preference  at  any  time  for  future 
goods  over  present  goods  of  like  kind  and  quantity,  adjust- 
ment is  made  as  far  as  possible  in  the  other  direction.^  If 
the  person  has  but  one  unit  (good  or  use)  to  dispose  of,  the 
use  can  be  either  now  or  later,  but  not  both  times.  Shall  the 
lunch  one  has  in  his  basket  be  eaten  now,  or  kept  until  noon  ? 

7  Review  ch.  10,  sec.  3,  on  the  relation  of  time  to  value,  and  sec. 
5  on  agencies  for  postponing  the  uses  of  goods. 


244 


TIME-VALUE  AND  INTEREST 


[Pt.  IV 


Shall  the  rare  flask  of  wine  of  romance  be  opened  now,  or 
kept  for  some  future  greater  occasion?  Often,  however,  the 
question  presented  is  that  of  distributing  a  stock  of  like  units, 
or  of  like  uses,  over  two  or  more  time-periods.  In  such  a  case 
as  the  bountiful  crop,  the  surplus  overflowing  the  usual  de- 
mands of  the  present  is  held  for  the  future.  The  anticipated 
future  desires  factor  as  present  desires  (more  or  less  weakened 
by  time  or  perspective  it  may  be).  They  claim  a  portion  of 
the  present  stock,  that  portion  which  if  used  at  present  would 
have  a  smaller  value.  Each  unit  of  like  goods,  under  the  law 
of  indifference,  must  have  equal  value  at  the  moment  whether 

to  be  used  at  the  pres- 

i\       , 


■A: 


vj* 


^'i*/. 


i*« 


B 


Fia.  31. 


Present  and  Future  Use  of  Homo- 
geneous Units. 


ent  or  the  future  (tho 
it  may  have  a  higher 
value  when  later  used) . 
Until  this  adjustment 
is  complete,  units  are 
shifted  from  one  time 
period  to  another,  ac- 
cording to  the  law  of 
substitution.  The  pos- 
sibility of  using  things 
later  thus  gives  a  valu- 
ation to  each  unit  of  any  present  stock  of  goods  higher  than 
it  would  have  if  the  goods  were  entirely  perishable  and  usable 
only  in  the  present.  In  Figure  31  if  the  present  stock  of 
meat  is  eight  units,  the  value  would  sink  to  one,  represented 
by  the  line  AB.  But  if  four  of  these  units  can  be  kept  for 
the  future,  the  present  takes  but  four  units,  and  the  value  will 
be  three  (line  CD)  for  each  unit,  whether  used  in  present  or 
in  future.  Note  that  units  five  to  eight  may  be  worth  more 
later  when  they  are  used,  and  probably  enter  into  present 
choice  at  a  discount  from  their  future  magnitude. 

On  the  whole  it  would  seem  that  in  a  greater  number  of 
cases  it  is  more  easily  possible  to  retain  a  surplus  of  present 
goods  for  future  use,  than  to  hasten  a  future   (unripe,  un- 


Ch.20]  time-preference  245 

finished,  or  merely  potential)  supply,  to  meet  present  uses. 
It  would  seem  that  present  value  is  more  often,  and  in  the 
case  of  more  kinds  of  goods,  and  in  a  greater  degree,  raised 
by  a  chance  shortage  than  it  is  unexpectedly  reduced  by  a 
chance  surplus.  For  usually  the  surplus  can  be  kept  as  is 
often  the  case  even  with  direct  consumptive  goods  (such  as 
grain,  coal,  textiles,  carriages,  etc.),  and  still  more  often  the 
case  with  indirect  durative  agents,  such  as  tools,  machinery, 
buildings,  stocks  of  metal,  etc. 

§  9.  Physical-change  accompanying  time-change.  Some 
goods  deteriorate  physically  by  keeping,  as  fruit  rotting  in 
the  bins;  some  remain  almost  unchanged  for  a  long  time,  the 
costing  trouble  and  expense  to  store  and  care  for,  as  cotton, 
grain,  and  fireworks.  Still  others  improve  physically  with 
time,  as  newly  brewed  beer,  newly  vinted  wine,  bananas  ripen- 
ing on  the  stem,  celery  blanching  in  the  cellar,  fattening 
poultry,  half  ripe  fruit  on  the  tree,  the  violin  seasoning  and 
growing  richer  in  tone. 

It  is  difficult  in  studying  the  problem  of  valuation  in  such 
cases  to  keep  clearly  distinct  the  two  ideas,  that  of  the  phys- 
ical change  that  goes  on,  and  that  of  the  pure  time-value 
change.  When  the  object  physically  improves  with  time  and 
at  the  same  time  increases  in  value,  the  physical  change  seems 
to  account  for  the  increase;  but  as  great  an  improvement 
physically  may  in  other  cases  be  accompanied  by  a  fall  in 
value.  It  is  evident  that  no  change  in  value  is  to  be  at- 
tributed solely  to  objective  changes  in  the  good,  without  re- 
gard to  complex  conditions  in  the  desires  of  men. 

In  all  such  cases  and  in  so  far  as  there  is  any  conscious  com- 
parison whatever,  it  is  the  net  desirability  (net  present  value) 
of  the  future  goods  that  is  compared  with  the  value  of  the 
present  goods.  If  half  of  the  apples  probably  will  rot  before 
it  will  be  time  to  use  them,  the  present  value  of  the  future 
apples,  per  bushel,  must  be  somewhat  more  than  twice  as  great 
as  present  apples  to  make  a  motive  for  keeping  them,  and 
further  allowance  must  be  made  for  trouble,  expense,  etc. 


246  TIME-VALUE  AND  INTEREST  [Pt.  IV 

But,  as  a  part  of  the  present  apples  are  expected  to  spoil,  they 
represent,  and  must  be  compared  with,  a  smaller  number  of 
apples  in  the  future.  The  physical  change  is  an  inevitable 
(or  a  practical)  condition,  of  the  time  change.  It  is,  so  to 
speak,  a  function  of  time.  It  happens  rarely,  perhaps,  that 
it  is  with  respect  solely  to  time,  in  simple,  unadulterated  form, 
that  time-choice,  time-preference,  and  time-value  are  pre- 
sented to  us.  Time-value  is  the  present  value-difference  be- 
tween the  possible  uses  of  a  thing  or  group  of  things  at  dif- 
ferent times.  If  therefore  the  lapse  of  time  is  accompanied 
by  increase  or  decrease  of  quantity,  or  by  gain  or  loss  in 
quality,  this  enters  into  choice  at  the  present  moment.* 

Undoubtedly,  the  importance  of  time  in  many  acts  of  busi- 
ness life  is  well  understood.  *  *  Time  is  money, "  is  a  business 
maxim.  But  neither  in  business  nor  in  the  philosophical  study 
of  value  has  the  omnipresence  of  the  time  element  been  fully 
appreciated.  This  chapter  has,  perhaps,  served  to  show  how 
time  is  a  factor  in  practically  all  economic  choice  and  in  prac- 
tically all  valuation.  Indeed,  time-value  and  time-preference 
have  aspects  that  transcend  economics;  they  are  universal 
phenomena  of  life  and  conduct. 

We  have  now  to  see  in  the  next  chapter  how  time-prefer- 
ence is  expressed  in  the  values  of  goods  and  how  in  these 
valuations  necessarily  a  rate  of  preference,  a  premium  for 
time,  comes  to  be  expressed  in  each  person's  valuations. 

8  Each  of  the  four  types  of  value  is  presented  in  manifold  com- 
binations with  the  other  three.  Time-preference  is  interwoven  in  the 
choice  of  things  with  relation  to  place,  stuff,  form.  Time-value  as  a 
matter  of  analysis  may  be  deemed  to  be  added  (algebraically  either  as 
plus  or  minus)  to  the  other  values  in  determining  the  sum  of  value  in 
a  good. 


Ch.  20]  TIME-PREFEKENCE  247 

Note 

Present  and  future  goods,  uses,  desires.  We  may  note  the  following 
distinctions  to  be  kept  in  mind  throughout  our  discussion. 

Present  goods  are  any  goods  actually  available  for  choice  at  the 
present  moment.  These  comprise  not  only  goods  that  may  be  used 
directly,  as  immediately  enjoyable,  but  indirect  agents  if  present.  Fu-' 
ture  goods  are  any  goods  that  will  not  be  available  for  choice  until 
some  future  moment. 

All  readj'  durative  goods  contain  either  present  or  future  uses,  or 
both  kinds.  The  uses  contained  in  goods  must  be  distinguished  from 
the  concrete  goods  themselves,  e.g.,  the  house  from  its  use  as  a  shelter, 
an  ax  from  its  cutting  of  the  wood.  (On  this  relation  between  the 
uses  and  concrete  agents  see  above,  chs.  11  and  12.)  A  future  good  when 
it  arrives,  may  contain  uses  available  at  various  economic  periods.  It 
is  not  unusual  to  speak  of  a  choice  between  present  goods  and  future 
goods  when  more  exactly  one  should  speak  of  a  choice  between  present 
an4  future  uses  of  goods.  As  any  particular  concrete  good,  as  a  field, 
a  building,  a  machine,  may  be  yielding  indirect  uses  of  many  ranks,  and 
of  many  degrees  of  futurity,  the  time  differences  involved  in  this  process 
must  be  expressed  in  terms  of  the  uses  rather  than  in  terms  of  the 
agents. 

In  every  case  the  choice  made  is,  at  the  moment  when  made,  a  present 
choice.  We  have  no  future  desires  tho  we  may  have  a  present  fore- 
cast of  a  future  desire.  "Future  desires"  means  desires  that  will  be 
present  at  some  future  time.  Present  desires  are  all  those  desires  now 
being  weighed  in  choice.  Present  desires  may  be  either  desires  for  pres- 
ent uses  or  for  future  uses  ( either  in  the  same  or  in  different  goods ) .  A 
present  desire  for  future  uses  is  but  the  anticipation  of  a  future  desire, 
tho  the  two  may  be  of  unequal  magnitude.  It  appears  therefore  that 
all  time-choices  are,  in  the  last  analysis,  reducible  to  choices  between 
present  desires  for  psychic-incomes  occurring  at  different  time-periods. 


CHAPTER  21 
RATE  OF  TIME-PREFERENCE 

§  1.  Subjective  rate  of  time-preference.  §  2.  Time-preference  showing 
in  care  and  repairs.  §  3.  Time-preference  showing  in  production  of  in- 
direct agents.  §  4.  Time-preference  rate  pervading  an  economy.  §  5. 
Time-preference  and  moral  weakness.  §  6.  Beginnings  of  durative  di- 
rect goods.  §  7.  Valuation  of  durative  direct  goods.  §  8.  Relation  of 
technic  to  time.  §  9.  Examples  of  technical  and  time-differences.  §  10. 
Degrees  of  roundaboutness  ruled  by  time-preference. 

§  1.  Subjective  rate  of  time-preference.  The  fundamen- 
tal ideas  of  value  (developed  in  Part  I)  have  application  to 
the  rate  of  time-preference.  Wherever  there  is  a  good  that 
offers  a  time-choice  to  its  possessor,  there  arises  valuation  as  re- 
gards time.  One  may  eat  the  apple  now  (a  typical  direct  good) 
or  postpone  its  use,  may  shift  it  forward  or  backward  in  time. 
"We  know  little  of  the  absolute  magnitudes  of  the  desires  that 
men  may  have  for  these  things  at  the  two  different  points  of 
time.  We  infer  only  that  if  a  man  eats  the  apple  now,  his 
desire  for  its  present  use  is  greater  than  his  present  desire 
for  its  future  use.  The  preference  of  the  present  may  be 
due  (case  1)  to  the  prospect  that  apples  which  are  scarce  now 
will  be  much  more  plentiful  in  the  future;  there  we  feel 
almost  warranted  in  saying  that  the  absolute  magnitude  of  the 
present  value  is  greater  than  it  will  be  at  that  future  time. 
We  at  least  feel  that  we  can  infer  something  as  to  this.  But 
again  (case  2)  the  present  use  is  chosen  when  the  prospect  is 
that  apples  will  be  no  more  plentiful,  indeed  when  it  is  cer- 
tain that  they  will  be  less  plentiful,  but  when  our  need  and 
our  desire  for  them  will  be  greater.  Again  (case  3)  when 
one  eats  a  part  and  keeps  a  part  of  a  large  crop  and  the  keep- 

248 


Ch.21] 


RATE  OF  TIME-PEEFERENCE 


249 


ing  involves  no  trouble  or  cost  whatever,  and  no  loss  from 
decay,  etc.,  there  may  be  no  difference  whatever  in  the  present 
values  of  the  different  units  of  the  stock.  The  principle  of 
indifference  applies.  But  in  almost  every  conceivable  case 
the  keeping  of  a  good  calls  for  some  labor  (thought  and  phys- 
ical effort)  and  the  use  of  agents  valuable  for  other  pur- 
poses (case  4).  The  present  value  of  a  future  unit  would 
have  to  be  therefore  at  least  enough  greater  than  that  of  the 
present  unit  to  make  up  this  additional  cost,  otherwise  it  will 
not  be  kept.  Present  value  plus  estimated  cost  of  keeping 
equals  present  value  of  future  unit.  There  is  time-preference 
for  the  future,  ex- 
actly offset  by  costs. 


ho 


'  <^^o         .  .  . 


I — ;:r-r: ' iB    Present  esTimote 

of  future    value 


.,  I    Cosjr 


R*ejenT  value 


Present 
value 


Rjrt  usea  new 
Fia.  32 


Pott  kept 


Comparison  of  Present  and  Futueb 
Values. 


The  marginal  unit 
for  each  period 
would  be  in  equilib- 
rium with  the  mar- 
ginal unit  in  the 
other  period.  (See 
Figure  32.) 

In  these  cases,  however,  there  is  no  element  of  pure  time- 
preference,  other  than  that  offset  by  costs,  no  degree  of  pref- 
erence for  the  present  unit  simply  because  it  is  present.  The 
supposition  involved  is  that  of  equality  of  value  to  the  results 
of  equal  expenditures  of  labor  and  to  equal  amounts  of  other 
agents  regardless  of  the  time-distance  at  which  various  prod- 
ucts would  appear.  Even  in  a  Crusoe  economy  such  a  pref- 
erence must  exist.  If  Crusoe  disregarded  all  time-differences 
he  would  take  exactly  the  same  thought  of  the  products  of 
fifty  years  distant  as  he  did  of  present  products  and  would 
put  just  as  much  of  his  labor  and  equipment  upon  them ;  that 
is,  he  would  divide  the  year's  products  into  fifty  (or  more) 
parts,  using  only  a  fiftieth.  Normally  he  uses  all  or  nearly 
all  of  this  year's  income,  leaving  to  next  year's  labor  and 
equipment  the  task  of  providing  for  next  year's  needs.  Prac- 
tical observation  and  all  the  considerations  adduced  above 


260  TIME-VALUE  AND  INTEREST  [Pt.  IV 

(Chapters  3,  10,  and  20)  regarding  man's  nature,  support  the 
view  that  present  desires  will  receive  on  the  whole  more  atten- 
tion than  future  desires.  If  any  true  time-preference  whatever 
prevails,  it  must  be  at  some  rate,  in  each  case,  tho  the  rate 
may  vary  with  the  mood  and  the  conditions  in  which  Crusoe 
finds  himself.  One  could,  by  watching  different  individuals 
working  at  their  own  affairs,  form  a  general  opinion,  often  a 
pretty  accurate  one,  as  to  whether  their  rates  of  time-prefer- 
ence were  high  or  low.  It  would  show  in  many  ways  in  their 
use  of  their  own  time  and  of  their  stocks  of  goods,  in  the 
qualities  of  thrift,  industry,  prudence,  etc.  But  to  express 
any  general  rate  at  all  exactly  would  be  most  difficult  so  long 
as  we  observed  only  the  choice  among  many  objects,  without 
any  common  standard  of  value  in  which  to  compare  them. 

§  2.  Time-preference  showing  in  care  and  repairs.  If 
Crusoe's  time-preference  (for  the  present)  were  very  high  it 
would  show  in  his  use  both  of  his  stock  of  enjoyable  goods 
and  of  his  stock  of  indirect  durative  agents.  (See  Chapter  11, 
section  11,  on  the  economy  of  repairs.)  When  he  landed  in 
his  canoe  he  would  let  it  lie  on  the  beach  at  the  risk  of  its  being 
filled  with  water  or  dashed  against  the  rocks,  or  carried  out 
to  sea.  This  act  necessarily  implies  that  at  that  moment  he 
values  his  own  effort  to  pull  it  up  more  than  he  values  the 
dimly  seen  necessity  of  bailing  it  out  to-morrow,  or  of  repair- 
ing the  injury  done  by  the  rocks,  or  of  making  a  new  one 
when  this  is  lost.  When  his  house  leaks  he  would  do  as  the 
proverbial  Arkansas  farmer  (not  peculiar  to  that  state),  who 
couldn't  mend  his  roof  when  there  was  rain  and  saw  no  need 
to  mend  it  when  there  wasn't.  Crusoe's  use  and  management 
of  his  garden,  of  his  fowls,  and  of  his  goats,  their  feeding, 
breeding  and  care,  all  would  involve  and  express  a  certain 
comparison  between  present  and  future  vegetables,  grain, 
eggs,  milk,  cheese,  goat  meat  and  skins,  his  own  labor,  etc. 
In  every  economy,  whether  in  Crusoe's  or  in  a  larger  com- 
munity, the  practice  of  each  individual  as  to  repairs  and  the 
efforts  made  by  him  to  offset  depreciation,  inevitably  embody 


Ch.21]  rate  of  time-preference  251 

that  individual's  rate  of  time-preference  in  a  thousand  ways, 
tho  it  varies  more  or  less  with  his  mood,  health,  fatigue, 
etc.,  and  tho  he  is  quite  unconscious  of  any  arithmetic 
expression  of  it. 

A  rate  would  show  itself  among  other  ways,  in  the  need  of 
more  labor  and  more  materials  later,  than  would  sufBee  now. 
A  handful  of  earth  may  stop  a  hole  in  a  dyke,  whereas  a 
trainload  would  be  insufficient  later.  Whenever  it  is  true 
that  a  stitch  in  time  (now)  saves  nine  (next  year)  and  the 
stitch  is  not  taken,  then  the  neglect  involves  a  rate  of  800  per 
cent  in  terms  of  present  stitches  (one  now,  increment  next 
year  eight).  If  one  lojjj] 
day's  labor  now  on 
the  canoe  is  found  by  ^^1 
experience  to  save  aoo^  L\mm\\\\\\\\\^^^^^ 
two     days'    labor    a 

,r«„^    i„+^«    „,,/!    ;+    ,•„        Fig.    33.     Timepkeferknce   and   Repaieb.* 

year  later   and  it  is 

not  taken,  then  the  rate  is  over  100  per  cent  a  year  (one  now, 
two  next  year;  increment  one,  or  100  per  cent  of  quantity). 
Plainly,  however,  two  greatly  diverse  rates  if  recog- 
nized, could  not  long  continue  to  exist  side  by  side.  For 
if  the  rate  were  even  99  per  cent,  not  only  would  the 
canoe  be  mended  but  the  stitch  would  be  taken  in  time 
wherever  it  would  save  two  or  more  stitches  next  year.  And 
so,  it  would  be  if  there  were  a  thousand  different  kinds  of 
repairs  to  be  done.  There  would  not  be  a  thousand  dif- 
ferent actual  rates  of  physical  increments ;  for  so  far  as  there 
is  any  normal  habit  or  consistency  in  the  individual's  conduct 
these  different  rates  of  increments  will  be  brought  more  or 
less  into  conformity  with  a  prevailing  rate  of  time-prefer- 
ence. "Whatever  that  rate  be,  there  is  good  reason  to  make  the 
possible  repairs  that  involve  a  greater  rate.    But  those  re- 

*  The  bars  of  different  length  represent  repairs  involving  different 
rates  of  time-preference.  If  the  rate  is  nine  per  cent,  all  the  kinds  of 
repairs  here  shown  would  be  made.  Tlie  same  illustration  applies  to 
the  choice  of  indirect  processes,  discussed  in  sec.  3. 


262  TIME- VALUE  AND  INTEREST  [Pt.  IV 

pairs,  the  neglect  of  which  involve  a  smaller  increment,  ought 
not  to  be  made.  The  rate  of  time-preference,  like  an  iso- 
thermal line,  marks  off  the  repairs  that  hypothetically  would 
involve  a  greater  increment  (and  which  now  are  made)  from 
those  which  involve  a  less  rate  (which  now  are  left  undone). 

Repair  is  nothing  but  a  particular  case  of  production  pre- 
senting the  peculiar  problems  of  complementary  agents. 
Even  where  time-preference  is  very  great,  repairs  will  be 
promptly  made  when  the  whole  agent  with  all  its  usance- 
value  may  be  put  back  into  running  order  by  replacing  a 
single  part  (as  by  mending  a  hole  in  a  canoe,  putting  a  new 
string  on  a  bow,  etc.).  It  is  the  anticipatory  repairs,  the 
ounce  of  prevention  that  is  most  likely  to  be  neglected  in  an 
improvident  economy.  "When  many  repairs  are  needed,  the 
repair  becomes  as  difficult  as  the  making  of  a  new  agent,  or 
more  difficult,  and  presents  practically  the  case  of  new  pro- 
duction. 

§  3,  Time-preference  showing  in  production  of  indirect 
agents.  A  rate  of  time-preference  is  reflected  in  the  physical 
increment  of  goods  in  many  cases.  Suppose  one  hundred  days 
of  labor  this  year  will  produce  one  thousand  fish,  caught  by 
wading  the  streams  or  will  make  a  canoe  which  will  enable 
one  hundred  days  of  labor  next  year  to  yield  1100  fish ;  and 
suppose  that  one  day's  labor  will  obtain  one  thousand  apples 
in  the  wild  forest,  and  will  plant  a  tree  that  will  yield  1100 
apples  next  year;  then  the  choice  of  the  relatively  indirect 
method  results  in  a  physical  excess  of  products  at  the  rate  of 
10  per  cent.  But  the  direct  method  is  chosen  and  will  con- 
tinue only  when  the  rate  of  time-preference  is  over  10  per 
cent,  and  is  abandoned  as  soon  as  the  rate  of  time-preference 
is  less  than  10  per  cent.  Whenever  a  Crusoe  ''gets  ahead 
far  enough"  in  his  equipment  to  have  a  canoe,  he  no  longer 
gets  his  fish  by  wading  the  streams  (except  at  unusually 
favorable  moments),  and  when  he  has  got  to  the  point  of 
having  an  orchard  he  no  longer  plans  to  gather  fruits  in  the 
forest  (the  he  will  pick  the  few  that  are  easiest  to  get) .    He 


Ch.21]  KATE  of  time-preference  253 

continues  this  choice  among  all  the  possible  present  and  future 
uses  of  his  present  labor  and  resources,  till  he  has  included 
all  the  time-consuming  methods,  whether  direct  or  indirect, 
that  involve  increments  as  great  as  his  rate  of  time-preference. 
That  rate,  however  it  may  fluctuate,  dominates  the  choice  of 
technical  processes.  A  man's  prevailing  attitude  of  mind  and 
habit  of  choice  between  present  and  future,  in  the  use  he 
makes  of  his  present  economic  agents  (labor  and  goods) 
marks,  so  to  speak,  an  isothermal  line  between  those  savings 
which  he  makes  (all  tending  to  the  same  rate  by  the  marginal 
law)  and  those  which  he  fails  to  make  (the  excluded  choices). 
Time-preference  (a  purely  psychological  fact)  involves  a  rate 
of  discount  or  of  premium  which  thus  would  show  itself  here 
and  there  in  a  certain  quantitative  surplus  or  increment  each 
year  over  the  yield  possible  by  the  alternative  methods. 
When,  however,  a  better  technical  method  is  in  use,  and  is 
warranted  by  the  rate  of  time-preference,  it  is  possible  only  at  a 
loss  to  go  back  to  the  older  method.  For  lack  of  a  saving  that 
involves  but  5  per  cent  discount  on  next  year's  goods,  one 
might  reduce  production  to  an  amount  involving  100  per  cent 
discount.  Evidently  this  would  be  a  maladjusted  economy, 
and  would  call  for  a  new  adjustment  of  agents  for  present 
and  future  uses. 

§  4.  Time-preference  rate  pervading  an  economy.  The 
mere  physical  increments  that  result  from  any  process  or 
method  of  production  are  not  necessarily  value  increments 
of  the  same  magnitude.  Indeed,  we  have  no  absolute  stand- 
ard by  which  to  measure  the  magnitude  of  a  person's 
valuations  in  two  different  periods,  any  more  than  we  have 
to  measure  the  magnitude  of  values  in  the  minds  of  two  dif- 
ferent persons  at  the  same  time.  If  one  values  100  present 
fruit  now  as  much  as  he  values  110  next  year,  we  can  not  say 
that  the  110  when  they  come  will  have  a  value  10  per  cent 
greater  than  they  have  now.  This  year  there  may  be  an  un- 
usually small  crop,  next  year  there  may  be  reason  to  expect 
an  unusually  large  crop.    Under  the  conditions  one  hundred 


254  TIME-VALUE  AND  INTEREST  [Pt.  IV 

present  fruit  may  have  a  present  worth  of  two  hundred  future 
fruit  at  the  same  time  that  many  other  choices  indicate  a  time- 
preference  rate  of  not  over  10  per  cent.  Again  we  must  con- 
fess that  we  have  no  absolute  standard  of  values  that  can  be 
carried  over  from  one  time  period  to  another. 

However,  when  we  stand  outside  of  an  individual  economy, 
overlooking  the  seasonal  variations  within  the  years  and  the 
changes  in  productive  methods  due  to  science  and  invention, 
and  we  see  how  on  the  average,  year  after  year,  choice  is  made, 
we  can  form  some  judgment  of  the  person's  prevailing  or 
pervading  rate  of  time-preference.  Such  a  rate  each  indi- 
vidual has;  and  these  rates  of  individuals  unite  into  a  time- 
price  when  two  or  more  persons  trade  present  for  future  pos- 
session of  goods.  Just  as  the  subjective,  individual  choices 
between  any  two  commodities  (Chapter  7,  sections  3-7)  enter 
into  a  market-price  of  objective  goods,  so  the  rates  of  time- 
preferences  of  individuals  trading  in  a  market  are  adjusted  to 
each  other  and  result  in  a  market-rate  of  time-preference. 

§  5.  Time-preference  and  moral  weakness.  Economics 
touches  frequently  upon  the  borders  of  ethics,  and  it  is  well 
to  observe  here  that  abstinence  is  but  an  aspect  of  choice  and 
will-power  which  has  effects  in  the  realm  of  moral  as  well 
as  of  economic  values.  If  there  were  to  be  formulated  an 
economics  of  personal  conduct,  it  surely  would  give  a  large 
place  to  the  comparison  between  present  and  future  enjoy- 
ments. 

The  problems  of  abstinence  and  time-value  appear  in  prod- 
igality, in  much  heedless  pleasure,  and  in  many  forms  of  vice. 
Prudence,  always  included  among  the  virtues,  is  the  faculty 
of  recognizing  not  only  future  costs  and  dangers  to  be  avoided, 
but  the  greater  future  joys  that  may  be  gained  at  the  price  of 
present  sacrifice.  It  is  not  without  reason  that  in  the  disci- 
pline of  youth  in  civil  and  military  life,  the  cultivation  of 
thrift,  order,  and  promptness  are  in  every  land  deemed  to  be 
fitting  means,  when  wisely  employed,  of  developing  moral 
virtues.    Shiftlessness  in  the  performance  of  tasks  for  one's 


Ch.21]  rate  of  TIME-PREFERENCE  255 

own  good  is  almost  certain  to  show  itself  in  failure  to  fulfil 
agreements  with  others,  resulting  in  excuses,  falsehood,  and 
degeneration  of  character. 

Time-value  is  involved  in  prodigality.  Often  the  estimate 
of  the  present  good  is  unduly  high,  viewed  in  the  light  of 
wider  experience.  Goods  that  meet  momentary  desires  make 
an  exaggerated  appeal  to  untrained  minds.  The  child,  the 
spendthrift,  the  savage,  can  not  properly  estimate  the  relative 
values  of  present  and  future.  The  drinker  exchanges  the 
hopes  of  a  worthy  life  for  the  exhilaration  of  the  spree.  The 
reckless,  underestimating  the  future  penalties  of  disease,  in- 
sanity, and  death,  barter  health  and  happiness  to  gratify  the 
moment's  impulse.  Indulgence  in  social  pleasures,  if  secured 
at  the  price  of  lost  sleep,  weakened  health,  and  debauched 
character,  are  loans  from  the  future  made  by  youthful  prod- 
igals at  usurious  cost.  If  no  one  ever  paid  more  than  a 
moderate  premium  for  the  gratification  of  his  present  whims 
and  impulses,  most  hospitals,  drug-stores,  and  medical  col- 
leges would  close,  and  half,  if  not  all,  the  prisons  would  be 
empty. 

§  6.  Beginnings  of  durative  direct  goods.  The  illustra- 
tions of  time-value  thus  far  have  been  of  consumptive  direct 
use  of  goods.  (See  the  analysis  in  Chapter  11,  section  1.) 
These  are  the  nearest  to  psychic  income,  and  in  this  class  of 
cases  time-value  appears  in  its  simplest  form.  Historically 
viewed,  likewise,  this  is  the  starting  point  of  time-value.  The 
animals  (with  few  exceptions)  live  only  in  the  realm  of  value 
that  contains  present,  direct,  consumptive  uses.  The  savage's 
range  of  vision  and  choice  is  wider,  but  still  is  limited  mainly 
to  direct  present  uses  gained  with  such  aid  as  his  simple  tools 
and  weapons  afford.  He  leads  necessarily  "a  hand  to  mouth" 
existence.  He  has  no  surplus  stock  except  by  lucky  chance. 
Lack  of  success  for  a  few  days  in  the  everlasting  search  for 
food  means  hunger,  then  famine,  and  the  diseases  which  al- 
ways follow  in  its  train.  The  increase  of  wealth  in  early 
times,  therefore,  took  largely  the  form  of  larger  stocks  of  di- 


256 


TIME-VALUE  AND  INTEREST 


[Pt.  IV 


Ddo/it  on  fuiin; 


rect  goods.  Some  of  these 
were  of  a  kind  that  could 
be  kept,  such  as  stores  of 
vegetable  food,  flocks  and 
herds  of  animals  kept  to  be 
y^  v««^  n  ,«*  eaten,   hoards   of  precious 

Pia.  34.    DiscoDNT  or  fdturk  Uses  in  ornaments,  more  and  better 

clothing  and  shelter,  weap- 
ons of  the  chase,  horses,  dogs,  etc.,  which  were  valued  also  as 
direct  agents  in  sport,  not  merely  as  means  of  getting  food. 

§  7.  Valuation  of  durative  direct  goods.  Let  us  now 
extend  our  study  of  time-value  to  more  durative  direct  goods. 
(See  numerous  illustrations,  Chapter  11,  sections  2  and  3.) 
Take  a  dwelling  as  an  example.  Literally  every  moment's 
use  of  a  house  is  a  separate  use,  but  for  convenience  these  in- 
finitesimal uses  are  grouped  into  conventional  units,  as  one 
day's  or  month's  or  year's  use,  evaluated  all  at  one  date.  The 
uses  of  a  house  for  the  next  ten  years  may  be  practically 
the  same  in  a  physical  sense  but  they  are  distributed  in  time. 
But  it  is  not  a  stock  of  present,  non-perishable  goods  which 
may  be  all  treated  as  present  uses  or  all  as  future  uses  subject 
to  the  leveling  influence  of  time-preference.  Each  use  is  fixed 
in  time  and  must  be  valued  there  or  not  at  all.  (See  Figure 
34.)  If  every  future  use  were  valued  now  without  discount, 
the  present  values  of  the  units  would  be  represented  by  the 
top  line.  If  this  occurred  in  the  case  of  a  durable  house  that 
should  last  a  hundred  years,  the  total  present  value  of  future 
uses  would  be  one  hundred  times  this  year's  use.  A  piece  of 
real-estate  kept  up  under  the  renting  contract  has  an  indefi- 
nite series  of  uses,  which  if  not  discounted  would  have  an  in- 
credibly large  present  value,  a  thousand  times,  or  an  infinite 
number  of  times,  the  value  of  the  annual  use.  But  if  the 
future  uses  (as  usually  happens)  are  discounted  in  the  pres< 
ent,  this  might  be  represented  by  the  descending  line. 
Such  regularity  results,  however,  only  in  a  market  where  the 
great  variety  of  individual  differences  of  conditions  have  been 


Ch.  21] 


RATE  OF  TIME-PREFERENCE 


257 


TCl 


B 


Fig.  35. 


Tearb 

Various  Individual  Valuations 
OF  Future  Uses. 


combined  into  a  market- 
rate  of  time-preference. 
A  (Figure  35)  has  a 
growing  family  and  the 
uses  of  the  house  will 
steadily  increase  for  the 
next  six  years,  and  then, 
as  his  children  leave 
home,  will  decline.  B  is 
expecting  to  be  away  for 
a  time,  and  the  house  will 
first  yield  uses  of  smaller,  then  of  larger,  value.  If  each  of 
these  persons  or  families  were  in  a  Crusoe  economy  such  dif- 
ferences would  affect  the  amount  of  labor  and  materials  put 
upon  a  house,  the  year  in  which  it  would  be  built  or  improved, 
etc.  But  in  a  market  for  house  uses  many  other  adjustments 
are  possible,  through  moving  out  and  moving  in,  buying  and 
selling,  sub-letting,  etc.,  by  which  these  differences  of  indi- 
viduals' circumstances  largely  disappear,  and  only  the  general 
and  persistent  discount,  reflecting  a  market-rate  of  time- 
preference,  remains.  A  diamond  necklace  is  a  good  example 
of  an  absolutely  durative  series  of  uses.  If  each  year  the 
value  of  the  use  is  expected  to  mature  as  one  hundred  dollars, 
the  necklace  would  have  an  infinite  value  if  the  future  uses 
were  not  discounted. 

§  8.  Relation  of  technic  to  time.  Directness  of  use  (tech- 
nical) and  timeliness  are  not  the  same.  (See  Chapter  10.) 
Of  the  thousands  of  forms  of  matter  in  the  world,  only  a  com- 
paratively few  ever  will  make  an  immediate  impression  on 
man's  senses.  But  many  of  them  are  in  his  life  so  connected 
with  uses  by  instinct,  association,  and  reasoning  that  he  at- 
taches an  importance  to  them.  In  most  cases  it  would  require 
close  thought  to  see  that  the  service  attributed  directly  to 
them  is  but  a  reflection  of  that  performed  by  some  other 
thing.  To  include  indirect  uses  in  choice,  calls  for  something 
the  same  kind  of  wider  vision  that  is  needed  to  include  future 


258 


TIME- VALUE  AND  INTEREST 


[Pt.  IV 


O 


# 


^^ 


^^ 


DIRECT  GOODS 
II       1 


-^ 


v*- 


J 


Fia.  36. 


N 


Rklation     op     TECnNIO 
TO  Time.* 


uses.  Indirectness  and  futurity  may  be,  and  often  are,  united 
in  a  single  concrete  good.  Indeed,  these  two  qualities  of  goods 
are  very  commonly  confused  in  thought,  whereas  their  grada- 
tions are  in  different  planes  of 
thought;  they  are,  so  to  speak, 
at  right  angles  with  each  other 
but  having  a  single  point  in 
common.  This  may  be  graphic- 
ally represented  as  in  Figure  36. 
§  9.  Examples  of  technical 
and  time  differences.  Mere 
technical  indirectness  per  se  has 
nothing  to  do  with  time-value. 
If  a  technical  process  involving 
a  half-dozen  or  more  steps  is 
completed  within  an  instant,  then  the  most  indirect  agent 
must  have  all  the  value  reflected  to  it  from  the  product,  sub- 
ject to  no  discount  on  account  of  the  lapse  of  time.  The  man 
can  get  the  nuts  by  climbing  the  tree,  or  by  taking  a  stick 
and  knocking  the  nuts  to  the  ground.  The  difference  in  the 
time  of  the  two  processes  is  negligible,  the  indirect  method 

•  The  block  A  represents  the  comparatively  small  area  of  direct  present 
goods.  The  economic  subject,  M,  enjoys  those  direct  uses  of  goods  at 
each  present  moment.  The  rectangle  A-Z  represents  all  present  goods, 
ranging  from  most  to  least  direct.  Their  technical  uses  are  being 
transmitted  along  the  line  from  Z  to  A,  while  M  and  all  his  possessions 
are  being  carried  along  from  M  to  N  by  the  stream  of  time.  The  indirect 
uses  of  goods  thus  are  like  swimmers  moving  toward  an  opposite  shore 
and  being  carried  along  by  the  time-stream.  They  move  across  at  differ- 
ent angles,  for  while  time  moves  at  the  same  rate  for  all,  the  swimmers 
move  forward  at  very  different  rates.  Some  uses  that  are  very  indirect 
technically,  are  causing  psychic  income  almost  at  once  (line  Z-B)  ;  other 
uses  but  slightly  indirect,  the  slow  swimmers,  are  not  to  attain  the  shore 
of  direct  use  for  a  long  time  as  they  move  through  the  successive  tech- 
nical stages.  The  course  they  describe  would  be  represented  by  the 
straight  line  Z  y  6 ;  or  if  the  early  indirect  steps  are  faster  or  slower 
than  the  later  ones,  the  agents  describe  courses  represented  by  Z  x  N 
and  Z  z  N. 


Ch.  21]  KATE  OF  TIME-PREFERENCE  259 

securing  the  product  as  soon  as  the  direct  method.  Hence 
there  is  no  choice  between  the  two  as  to  the  time-remoteness 
of  the  product,  but  only  as  to  the  amount  of  the  product  per 
unit  of  labor  (or  ease  of  labor  to  get  the  same  product).  If 
sticks  are  free  goods,  the  whole  amount  of  the  additional 
product  is  attributed  to  the  labor ;  if  sticks  are  scarce,  a  part 
of  the  product  must  be  attributed  to  the  usance  of  the  stick. 
But  that  is  a  usance-problem,  not  a  time-value-problem.  But 
if  the  same  amount  of  labor  will  plant  another  tree  which  will 
yield  a  much  larger  and  better  crop  annually  after  twenty 
years,  then  time  is  an  element.  Or  again :  the  coal  heats  the 
iron  tubes,  the  tubes  heat  the  water,  the  steam  moves  the 
piston  rod,  the  piston  rod  turns  the  wheel,  the  wheel  a  belt,  the 
belt  turns  a  dynamo,  the  dynamo  generates  electricity,  the 
electricity  is  carried  through  a  wire  to  a  filament  in  a  glass 
bulb,  and  you  are  enjoying  artificial  daylight  in  your  home. 
The  coal  is  the  first  link  in  a  chain  of  indirect  uses  the  last 
link  of  which  is  at  the  same  instant  yielding  a  direct  use. 
Whatever  part  of  the  value  of  the  use  is  imputable  to  the 
coal  on  value-principles,  as  one  of  the  various  complementary 
agents,  is,  so  to  speak,  payable  on  the  instant.  When,  how- 
ever, the  roundaboutness  of  the  process  is  necessarily  time- 
consuming,  then  time-preference  operates.  For  an  interval 
of  time  divides  the  indirect  use  of  the  agent  and  the  final 
psychic  income  from  which  its  value  must  be  reflected.  If 
the  coal  has  been  mined  for  some  time,  time-value  is  involved 
in  the  relation  between  the  worth  of  the  coal  when  it  was 
mined  and  its  worth  when  it  is  turned  into  illumination. 
Various  possible  ultimate  uses,  at  various  degrees  of  distance 
in  time  from  the  present,  some  a  year,  some  five  years,  some 
twenty  years,  may  compete  for  some  indirect  agents.  The 
various  products  are  located  at  different  points  in  the  line  of 
time,  and  because  of  this  difference  (besides  other  differences) 
appeal  w'ith  varying  degrees  of  force  to  desires.  If  this  were 
not  so  time-preference  would  have  a  zero  magnitude.^ 

1  This  distinction  between  timeliness  and  roundaboutness  must  be  kept 


260  TIME-VALUE  AND  INTEREST  [Pt.  IV 

§  10.  Degrees  of  roundaboutness  ruled  by  time-prefer- 
ence. Nearly  the  whole  of  the  great  mass  of  indirect  goods 
applied  to  making  stuff-,  form-,  and  time-changes  require 
more  or  less  the  lapse  of  time  to  yield  their  uses.  True, 
the  indirect  uses  as  well  as  the  direct  uses  of  goods  (see  Chap- 
ters 9  and  10)  may  be  more  or  less  hastened  or  delayed,  but 
that  is  a  time-change  that  involves  the  sacrifice  of  other  agents. 
There  is  in  each,  economy  a  certain  normal  time-point,  a  point 
of  maximum  economy  for  a  product  to  appear.  Rush  orders 
are  always  costly.  If  a  horse  is  worked  beyond  a  certain 
point,  the  present  use  shortens  the  horse's  working  life.  If, 
to  save  another  trip,  a  wagon  is  too  heavily  loaded  it  is 
strained  or  broken.  If  a  machine  is  geared  to  run  beyond  a 
certain  speed,  it  does  poorer  work  or  goes  to  pieces.  A  sud- 
den rise  in  the  value  of  the  product  may  warrant  the  sacrifice 
of  agents.  To  warn  the  inhabitants  of  the  valley  that  the  dam 
has  broken,  the  rider  may  ride  his  horse  to  death.  To  keep 
from  freezing,  a  man  will  use  mahogany  furniture  as  fire- 
wood. A  war  vessel  going  into  action  throws  overboard  the 
piano  and  other  cabin  fittings.  The  outbreak  of  war  sets  all 
the  armories  to  working  overtime. 

"What  is  the  psychological  change  that  happens  in  these 
cases?  The  present  use  suddenly  becomes  so  much  more 
valuable  than  the  future  use,  is  so  much  preferred,  that 
the  mode  of  use,  or  intensity  of  use,  is  altered.  Time-pref- 
erence dominates  the  technical  processes.  And  this  is  so  in 
normal  as  in  abnormal  times.  The  normal  time-point,  the 
point  of  maximum  economy,  at  any  period,  is  one  where  the 
uses  of  indirect  agents  are  distributed  along  the  path  of  time 
in  accord  with  an  existing  rate  of  time-preference.  If  next 
year's  uses  are  now  valued  just  as  much  as  this  year's  uses, 
there  would  be  one  choice  of  roundabout  processes,  if  they  are 
valued  one  tenth  less,  there  will  be  a  very  different  applica- 

clearly  in  mind,  for  confusion  at  this  point  betrays  one  into  a  false 
notion  of  the  nature  of  interest. 


Ch.  21]  RATE  OF  TIME-PREFERENCE  261 

tiou  of  indirect  agents.  There  is  thus  a  relation  between 
roundaboutness  and  time-preference,  but  it  is  one  in  which 
the  mere  mechanical  method  is  passive  and  subordinate  to 
human  choice,  time-preference. 


CHAPTER  22 
MONEY  AND  CAPITALIZATION 

§  1.  The  functions  of  money.  §  2.  The  standard  of  deferred  payments. 
§  3.  Property.  §  4.  Wealth  and  property  rights.  §  5.  Origin  of  cai)i- 
tal;  its  definition.  §  6.  Capitalization  of  direct  durative  agents.  §  7. 
Capitalization  of  indirect  durative  agents.  §  8.  Time-price  without 
loans.     §  9.  Present  price  and  the  discount  on  future  uses. 

§  1.  The  functions  of  money.  As  trade  among  a  number 
of  traders  is  greatly  facilitated  and  price  is  given  a  more 
exact  expression  when  a  common  objective  standard,  money, 
comes  into  use,  so  a  price  paid  for  time-transfers  of  many 
kinds  can  be  much  better  expressed  in  a  common  standard 
by  the  use  of  money. 

Money  is  first  a  means  of  trade,  a  medium  of  exchange. 
(For  preliminary  definition,  see  above.  Chapter  7.)  It  is 
some  object  which  has  value  to  all  men  and  which,  because  of 
its  convenience,  comes  to  have  the  most  general  marketability 
of  any  good.  It  is  thus  selected  because  of  certain  qualities  in 
which  it  excels  any  other  good.  It  is  always  some  object  con- 
taining, in  the  view  of  every  one,  a  good  deal  of  value  in  small 
bulk,  most  easily  kept  without  physical  decay,  and  that  has 
come,  as  markets  develop,  to  be  one  of  the  goods  in  most 
trades. 

The  general  medium  of  exchange  is  necessarily  the  most 
general  price-good.  As  all  other  things  are  constantly  ex- 
changed for  money,  they  can  each  in  turn  be  compared  with 
all  the  others  in  terms  of  money.  It  becomes  the  common 
denominator  of  prices.  The  price  of  any  one  thing  in  terms 
of  another  can  be  found  from  the  money-prices  of  the  two. 

262 


Ch.22]  money  and  capitalization  263 

This  permits  and  cultivates  habits  of  exacter  conscious  cal- 
culation of  prices  both  by  buyers  and  sellers  than  were  before 
possible. 

"Whenever  money  is  kept  for  an  hour  or  a  day,  awaiting  the 
fitting  moment  to  complete  the  double  exchange,  it  is  serving 
the  purpose  of  a  storehouse  of  saving.  Because  of  the  same 
qualities  that  make  it  generally  exchangeable  (certainty  of 
sale  and  physical  durability)  it  is  one  of  the  best  objects  to 
keep  for  longer  periods  (to  be  saved,  hoarded)  against  a  day 
of  need.  It  is  a  generalized  means  of  abstinence,  kept  for  a 
general  purpose  without  choice  as  yet  of  the  particular  good 
for  which  it  will  be  spent.  The  use  of  money  as  a  storehouse 
of  saving  was  more  common  formerly  than  it  is  now,  for  in 
advanced  countries  better  ways  than  the  hoarding  of  money 
are  found  for  "laying  up  for  a  rainy  day."  In  some  meas- 
ure, however,  even  here  money  serves  this  use  and  in  large 
parts  of  the  world  as  in  Egypt,  China,  India,  this  use  is  of 
very  great  importance.  A  thing  ceases  to  be  money,  logically 
viewed,  the  moment  its  owner  keeps  it  without  the  purpose 
that  it  shall  be  spent  ultimately.  The  typical  miser  is  a  man 
who  has  lost  his  reason  as  regards  the  money  use,  has  for- 
gotten that  it  is  a  means  to  an  end.  Whether  serving  as  a 
storehouse  of  saving  or  as  a  medium  of  exchange,  in  either 
case  money  is  to  be  kept  only  till  the  moment  when  the  owner 
believes  it  will  best  gratify  his  desires.  Its  use  thus  even  as 
a  medium  of  exchange  involves  a  recognition,  and  a  more  or 
less  conscious  calculation,  of  time-value. 

§  2.  The  standard  of  deferred  pajrments.  But  this  con- 
nection with  time-value  is  yet  more  important  as  money  comes 
to  be  used  more  and  more  as  a  standard  of  deferred  payments, 
a  standard  for  prices  over  a  period  of  time.  A  deferred  pay- 
ment is  a  payment  made  in  fulfilment  of  a  bargain  made  for 
goods  delivered  at  an  earlier  date.  It  is  the  completion  of  a 
credit  transaction.  Credit  means,  first,  trust  or  confidence  re- 
posed by  a  seller  in  a  buyer,  and  hence  the  selling  of  things 
* '  on  trust, ' '  in  exchange  for  a  promise  of  pay  at  a  later  date. 


264  TIME-VALUE  AND  INTEREST  [Px.  IV 

Now  as  money  is  the  common  price  denominator,  and  the  price 
of  nearly  all  things  whether  they  are  sold  for  cash  or  on 
credit  is  expressed  in  money,  it  is  the  unit  in  which  the  com- 
parison of  goods  is  made  when  one  chooses  goods  in  different 
periods  of  time.  It  is  not  an  absolute  standard  of  value;  a 
"dollar"  is  not  necessarily  of  the  same  value-magnitude  to 
any  one  person  from  year  to  year,  much  less  to  all  persons 
together.  Money  is  subject  to  fluctuations  of  its  own  (for  ex- 
ample, those  due  to  changes  in  gold  production)  having  re- 
markable consequences  in  industry  which  must  be  separately 
studied.  But  money  is  taken  as  the  objective  standard  in  bor- 
rowing and  lending  to  which  the  time-preferences  of  men 
are  adjusted,  as  value  is  adjusted  to  price.  This  is  to  be 
treated  under  the  subject  of  interest. 

§  3.  Property.  No  trade  of  goods  is  possible  unless  the 
trader  has  possession  of  the  goods,  or  can  deliver  that  control 
over  to  the  other  party  in  the  trade.  The  fact  of  possession 
is  implied  in  all  discussions  of  value,  price,  use,  and  rent. 
Possession  is  a  legal  fact.  It  is  legal  control,  not  physical 
hold  of  goods.  In  any  settled  community  it  must  be  regu- 
lated by  law,  the  law  of  property.  Property  is  ownership. 
It  is  an  intangible  right;  only  by  a  loose  figure  of  speech  has 
it  come  to  be  applied  to  the  object  owned  (e.g.,  a  man  has  a 
property  in  a  house  and  lot — real  estate ;  hence  the  house  and 
lot  are  called  his  property).  The  law  of  property  is  the  rule 
of  the  community  determining  control  over  economic  goods. 
Economic  goods  are  valuable;  other  persons  would  like  to 
have  them.  A  property  right  is  either  a  claim  upon  some 
one  else  or  a  limitation  of  some  one  else's  claim.  You  say  in 
various  ways,  this  house  with  land  is  mine,  it  is  my  own,  it  is 
owned  by  me,  it  is  my  property,  I  have  a  property  right  in  it, 
it  belongs  to  me,  etc.  All  these  phrases  express  your  right  to 
have  and  use  as  against  other  men 's  rights.  But  you  may  sell 
to  another  man  a  right  to  a  method  of  use  or  to  a  limited  pe- 
riod of  use,  in  a  written  instrument,  a  lease.  He  then  has  a 
legal  right  in  his  leasehold,  and  your  right  is  limited  by  his. 


Cu.22]  MONEY     AND  CAPITALIZATION  265 

He  may  have  an  "equity"  in  the  house  (a  claim  upon  the  in- 
come from  the  house  which  formerly  was  enforceable  in  a 
court  of  equity) .  At  the  same  time  you  may  get  repairs  made 
by  mechanics  who  until  paid  have  a  legal  claim  for  which  the 
house  itself  is  legal  security  (law  of  mechanics'  lien).  And  so 
there  may  be  a  score  of  overlapping  and  mutually  limiting 
claims  upon  the  income  from  one  economic  agent.  There  is 
a  legal  distinction  between  your  legal  claim  to  the  fee  simple 
of  a  landed  estate,  and  the  various  legal  claims  upon  you,  or 
equitable  interests  in  the  house  (when  it  is  the  security).  But 
it  is  property  rights  that  are  traded  rather  than  the  things 
themselves,  for  legally  each  party  in  a  trade  can  deliver  the 
possession  and  use  only  of  that  limited  part,  aspect,  or  mode 
of  use,  of  goods,  which  is  his. 

§  4.  Wealth  and  property  rights.  The  valuable  objects 
themselves,  such  as  lands,  houses,  cattle,  implements,  and 
ships,  are  wealth.  If  there  are  no  overlapping  legal  rights, 
the  property  right  to  a  piece  of  wealth  has  the  value  of  the 
wealth  itself.  In  simple  conditions  of  industry  each  piece  of 
wealth  had  one  owner  who  had  the  right  to  all  the  income  of 
that  wealth;  or  if  others  had  overlapping  claims  (of  landlord, 
sovereign,  etc.),  they  were  of  a  fixed  sort,  not  objects  of  sale. 
Neither  the  objects  of  wealth  (the  lands,  etc.)  nor  outsiders' 
claims  upon  them  were  ordinarily  bought  and  sold.  There- 
fore their  magnitude  was  usually  estimated  in  terms  of  their 
rents,  or  incomes,  and  not  in  terms  of  their  price  if  sold  as  a 
whole.  In  England,  where  land  rarely  changes  hands  except 
by  inheritance,  an  income  whether  from  land  or  other  sources 
is  still  spoken  of  as  worth  so  many  pounds  a  year,  rather  than 
as  worth  so  much  as  a  whole.  As  there  comes  to  be  a  net- 
work of  property  rights  extending  over  the  wealth,  and  mu- 
tually delimiting  each  other,  it  is  evident  that  the  total  price 
of  these  rights  can  not  exceed  the  total  price  of  the  uses  (prod- 
ucts) of  the  wealth.  The  different  pieces  of  wealth  have 
yields  that  are  impersonal — the  field  yields  its  crop,  the  house 
its  services,  the  ship  its  uses,  and  these  impersonal  yields  are 


266  TIME- VALUE  AND  INTEREST  [Pt.IV 

apportioned  to  different  persons  as  incomes  according  to  tlieir 
property  rights.  Two  or  more  men  may  be  partners,  one  en- 
titled to  ^,  another  to  %  and  another  to  %  of  the  total  usance ; 
or  before  these  incomes  are  apportioned,  many  other  small 
prior  claims  may  be  first  deducted.  Corporate  ownership  with 
small  shares  of  stock  gives  a  much  greater  division  of  claims 
upon  income. 

]\Iore  and  more  it  is  these  claims  to  income  that  have  come 
to  be  the  objects  of  trade  among  men,  rather  than  the  con- 
crete wealth  itself.  One  may  be  a  very  rich  man  to-day  and  not 
own  outright,  in  fee  simple,  any  but  small  personal  belong- 
ings. He  does  not  own  wealth  in  the  old-fashioned  w^ay,  he 
has  capital,  and  is  a  capitalist. 

§  5.  Origin  of  capital ;  its  definition.  Capital  is  from 
'ihe  Latin  adjective  capitalis  (from  caput,  head)  in  the 
phrase  capitalis  pars,  the  chief  part,  principal  part;  hence 
principal,  of  a  money-loan.  The  capital,  or  principal,  of  the 
lender  was  this  amount  of  money,  distinct  from  the  usury 
(originally  meaning  the  sum  paid  for  the  use)  or  interest, 
the  amount  in  addition  which  was  due  him  at  the  expiration 
of  the  loan.  Money  loans  of  this  kind  were  rare  except  among 
merchants  in  cities,  and  the  borrower  on  his  part  looked  upon 
the  capital  as  the  amount  he  had  to  ''invest"  (literally,  clothe) 
in  various  kinds  of  goods.  Taking  these  goods  to  a  distant 
market,  or  changing  them  by  manufacture  into  more  valuable 
forms,  he  expected  to  regain  when  he  sold  them  not  only  his 
capital  but  more  than  enough  to  pay  the  interest. 

Merchants,  manufacturers,  bankers,  were  constantly  thus 
investing  capital.  They  came  to  estimate  in  terms  of  capital 
not  only  the  sums  borrowed  and  lent  but  the  value  of  all  their 
own  rights  in  the  goods.  Even  now  the  capital-mode  of  ex- 
pression is  less  common  in  the  rural  economy,  tho  it  is  in- 
creasingly used  by  farmers  of  the  enterprising  sort,  who 
are  borrowing  and  making  improvements,  getting  better  equip- 
ment, etc.,  in  many  cases  in  America  going  so  far  as  to  count 
also  the  original  price  of  the  land,  or  its  present  value,  as  a 


Ch.22]  money     and  CAPITALIZATION  267 

part  of  their  capital.  We  may  define  capital  in  accordance 
with  this  modern  view. 

Capital  is  a  person's  investment  power  as  expressed  in 
terras  of  money,  being  a  person's  property  rights  to  income, 
estimated,  as  to  amount,  with  reference  to  market  conditions. 
These  property  rights  may  be  composed  in  part  of  claims 
upon  income  arising  from  the  labor  of  others;  a  promissory 
note  given  by  a  student  of  good  credit,  or  by  an  inventor 
hoping  to  continue  his  experiments,  is  capital  in  so  far  as  it 
is  saleable,  or  bankable,  tho  the  income  from  which  it  will 
be  paid  is  to  come  from  personal  resources  and  not  from  any 
material  agents. 

Business-  or  industrial-capital  is  more  specifically  that  part 
of  a  man's  capital  which  is  invested  in  his  business,  from 
which  to  draw  a  monetary  income.  The  value  of  his  house, 
furniture,  and  personal  belongings  is  capital,  tho  ordinarily 
not  thought  of  as  such,  but  as  means  of  enjoyment.  In  an 
emergency  they  may  be  converted  into  money  to  be  used  in 
his  business,  and  being  part  of  the  property  available  to  pay 
his  debts,  they  help  to  give  him  greater  credit  at  all  times. 
Nominal  capital  is  the  amount  of  shares  of  stock  issued  by  a 
corporation,  taken  at  their  par,  or  nominal,  amount.  It  may 
have  little  relation  to  the  true  investment.  "Where  there  is 
no  regulation  of  stock  issues,  a  company  with  no  true  capital 
may  print  shares  of  millions  of  dollars  of  nominal  capital.  In 
financial  statistics,  bonds  as  well  as  stocks  are  often  included 
in  the  nominal  capital  (as  in  the  reports  on  capital  in  Amer- 
ican railroads) . 

§  6.  Capitalization  of  direct  durative  agents.  Capital  can 
either  be  pledged,  or  sold  outright  at  a  price.^  Capitalization 
is  the  process  of  calculating  the  market-price  of  saleable  in- 
comes (whether  sold  now  or  not).  It  is  the  estimation  of  the 
present  worth  of  marketable  incomes.  This  gives  us  another 
way  of  defining  capital:  capital  is  any  right  to  prospective 
income  that  can  be  capitalized. 

iTlie  Value  of  a  slave  may  be  capital.     A  man,  in  our  times,  may 


268  TIME-VALUE  AND  INTEREST  [Pt.  IV 

Some  expression  of  the  present  worth  of  future  uses  is  in- 
volved in  the  choice  made  by  the  individual  between  any  two 
uses  that  are  not  of  the  same  time-period.  It  is  easy  to  see 
that  this  is  so  in  every  case  where  a  present  stock  of  goods  is 
kept  for  use  in  different  periods ;  it  is  so  in  every  case  of  re- 
pair of  agents  for  future  use;  it  is  so  in  every  case  where 
goods  are  produced  for  the  future. 

Many  of  these  choices  involve  the  choice  of  an  object  con- 
taining a  number  of  uses  of  different  time-periods,  which  are 
summed  up — capitalized.  Take  a  direct  durative  good,  such 
as  a  fan,  a  house,  a  pleasure  boat,  an  article  of  clothing,  etc. 
That  on  which  the  value  of  the  good  as  a  whole  is  based  is  a 
series  of  uses  which  can  not  all  be  present.  The  fan  repre- 
sents all  the  cooling  drafts  to  be  got  from  it  not  only  to-day, 
but  many  days  to  come.  Additional  uses  may  be  obtained 
from  the  house  by  crowding  more  people  into  it,  possibly  thus 
slightly  increasing  the  wear,  but  in  no  way  can  next  year's 
shelter  be  obtained  until  next  year.  Each  durative  agent 
yields  its  uses  through  a  period  of  time,  a  period  usually  not 
to  be  shortened  except  at  a  cost.  The  maximum  economy  of 
utilization  (see  Chapter  13)  gives  a  series  of  uses  ^t  different 
times  and  of  unequal  present  values.  Each  succeeding  year's 
use,  until  the  agent  is  expected  to  wear  out,  is  adjusted  to  the 
value  of  this  year 's ;  that  is,  it  is  reduced  to  its  present  worth, 
and  the  sum  of  the  present  worths  is  the  present  value  of  the 
agent.  Representing  the  total  value  of  the  series  as  P  and  the 
annual  incomes  as  a'  for  the  first  year,  etc.,  and  the  life  of  the 
agent  as  four  years,  we  have : 

P  =  present  worth  of  (a'  +  a''  +  a" '  +  a"  ")  and  substi- 
tuting an  assumed  present  worth  of  a, 

P=  (10  +  9  +  84-7)  =34 

not  legally  sell  himself  into  slavery.  Therefore,  free  men,  in  any  full 
sense,  are  not  capital,  and  it  is  misleading  to  speak  of  them  as  such, 
or  to  estimate  their  capital  value  as  is  sometimes  done.  But  to  a 
limited  extent,  carefully  guarded  by  law,  a  man  may  borrow  and  pledge 
liis  future  earning  power,  and  thus  capitalize  it. 


Ch.22]  money     and  CAPITALIZATION  269 

§  7.  Capitalization  of  indirect  durative  agents.  This 
process  of  valuing  direct  uses  is  extended  to  tliose  indirect 
agents  whose  uses  are  more  or  less  removed  in  time.  Desires 
are  so  expansible  that  if  the  right  kind  and  quality  of  direct 
goods  could  be  had  at  will,  enormously  greater  amounts  would 
be  used.  But  the  continued  income  of  present  goods  is  de- 
pendent on  durative  agents.  The  psychic  income  of  a  civilized 
community  is  conditioned  on  a  favorable  and  extremely  re- 
fined environment:  houses,  libraries,  theaters,  the  agencies  of 
travel,  as  well  as  the  sources  supplying  the  more  material 
needs.  These  agents,  even  in  the  richest  community,  are  lim- 
ited in  variety,  in  quality,  and  in  number.  The  present  price 
of  these  goods  is  the  capitalization  of  the  expected  uses  they 
contain. 

If  a  limited  supply  of  agents  could  and  did  produce  at  any 
moment  unlimited  products,  they  would  become  free  goods. 
The  yield  of  the  uses  of  most  things  depends,  however,  upon 
the  lapse  of  time :  an  acre  of  land  with  the  most  perfect  culti- 
vation can  not  feed  the  world;  but  remove  the  limit  of  time, 
wait  an  eternity,  and  the  acre  would  yield  an  infinite  crop. 
Moreover,  the  economic  return  of  agents  in  a  given  period 
is  reached  sooner  than  is  the  maximum  physical  return.  If 
agents  are  forced  to  yield  more  bountifully,  it  is  at  the  cost 
of  other  goods.  A  point  of  maximum  net  yield  is  found  in 
any  given  period  dependent  on  the  rate  of  time-preference 
(see  above,  Chapter  21,  section  10).  Here  also  the  lapse  of 
time  is  the  condition  of  the  increase  of  the  values  derivable 
from  limited  agents. 

§  8.  Time-price  without  loans.  It  is  clear  then  that  dis- 
counts of  future  uses  are  necessarily  involved  in  an  individu- 
al's valuations  of  all  his  own  goods  which  have  any  durative- 
ness  whatever — necessarily  whether  the  person  is  conscious  of 
it  or  not.  The  expression  of  this  discount  on  the  future  (or 
premium  on  the  present)  may  be  and  often  is  inexact  and  vari- 
able, but  the  fact  of  the  discount  (or  premium)  is  always 
there.    If  this  were  not  so  and  present  uses  in  technical  proc- 


270  TIME- VALUE  AND  INTEREST  [Pt.  IV 

esses  were  not  on  the  whole  treated  as  more  important  than 
future  uses,  labor  and  resources  of  all  kinds  would  be  dis- 
tributed impartially  over  the  most  distant  periods  of  time. 
In  the  extreme  case  one  might  starve  himself  to  death  in  youth 
while  producing  goods  for  his  old  age. 

Now  if  these  discounts  are  involved  in  valuations,  they  must 
play  their  part  in  determining  the  prices  at  which  trades  of 
objects  containing  different  time-periods  are  made.  Time- 
value  bears  the  same  relation  to  time-price  that  value  of  di- 
rect commodities  does  to  their  price.  (See  Chapter  7.) 
Generically  the  time-price  problem  is  the  same  as  the  problem 
of  commodity-price,  and  of  usance-price  (rent)  ;  specifically 
it  is  different  only  in  as  much  as  the  particular  value  is  that 
due  to  time.  Collectively  the  valuations  are  the  basis  of 
price,  but  severally  the  valuations  are  socialized  and  modified 
by  price.  That  is,  the  existence  of  the  market  gives  new  con- 
ditions of  substitution  of  goods  in  point  of  time,  and  presents 
new  motives  and  possibilities  of  using  wealth. 

Let  us  see  how  an  arithmetic  rate  is  involved  in  such  trades, 
when  the  prices  are  expressed  in  money-terms.  Trader  A 
has  a  steer  ready  to  market  that  will  sell  now  for  $100;  he 
trades  it  to  B  for  five  calves  that  will  sell  for  $102  each  in 
three  years,  meantime  costing  to  keep,  including  allowance  for 
labor  and  trouble,  $25  a  year  each  (counted  at  the  end  of  each 
year).  A  gives  $100  now,  plus  $125  a  year  hence,  plus  $125 
two  years  hence,  plus  $125  three  years  hence,  total  $475,  to  get 
a  capital  of  $510  at  the  end  of  three  years.^  In  this  trade 
there  is  involved  a  premium  on  the  investment  at  the  rate  of 
5  per  cent.  Do  the  two  parties  need  to  know  this  when  they 
trade  ?  Not  exactly  as  an  arithmetic  expression,  but  approxi- 
mately as  to  the  outcome. 

2  Of  course  there  are  other  reasons  why  the  trade  may  be  made,  such 
as  the  better  means  that  A  has  for  feeding  calves,  the  special  use  B 
has  for  fat  steers,  etc.  Attention  is  limited  here  to  the  time-price 
problem,  in  cases  where  the  prices  and  costs  are  the  same  to  both 
parties. 


Cn.22]  MONEY    AND  CAPITALIZATION  271 

§  9.    Present   price   and   the   discount   on   future   uses. 

Every  exchange  of  a  durable  agent  involves  an  estimate,  rough 
and  imperfect  it  may  be,  of  that  agent's  future.  The  prac- 
tical traders,  who  in  agreeing  upon  a  price  are  thus  involving 
a  rate  of  capitalization  of  goods,  are  usually  only  dimly  con- 
scious of  the  logical  nature  of  the  process.  In  merely  occa- 
sional trades  the  process  usually  goes  on  in  a  very  empirical 
way,  by  the  method  of  trial  and  error.  The  future  changes 
are  only  roughly,  not  accurately,  estimated.  What  each  tries 
to  do  is  to  get  as  much  as  he  can  and  give  as  little  as  he  must, 
and,  comparing  one  line  of  trades  with  another,  shifts  back 
and  forth  to  the  line  that  gives  the  best  results.  But  the 
shrewd  bargainer  is  the  one  who  foresees  more  clearly  than 
his  fellows  the  complex  changes  to  come  or  shows  an  intuitive 
sense  of  the  net  result  that  the  common  mind  lacks.  The 
ability  and  the  inability  to  foresee  such  changes  make  men 
rich  and  poor.  In  all  this  bidding  for  capital  the  logical  basis 
of  the  present  value  is  the  series  of  expected  incomes.  When 
the  agent  is  bought  outright,  the  very  concluding  of  the  bar- 
gain fixes  a  relation  between  the  expected  value  of  the  income 
and  the  value  of  the  capital  invested.  This  discount  on  the 
future  incomes  (which  is  involved  in  the  lower  present  price) 
evolves,  as  the  agent  is  kept  and  yields  the  expected  income, 
as  a  rate  of  premium  on  the  purchase  price,  that  is,  as  a  rate 
per  cent  on  the  amount  of  invested  capital. 

There  are,  of  course,  different  markets  for  time  as  for  other 
things  at  the  same  moment  and  near  each  other.  In  these  the 
time-rate  varies,  being  high  in  poor  economies  and  low  in  good 
ones.  Temporarily,  as  in  time  of  war,  or  a  panic,  the  rate 
may  become  very  high,  as  shown  by  the  abrupt  fall  of  prices 
in  commercial  centers,  when  prices  throughout  the  country  are 
but  slightly  affected.  The  communication  between  the  differ- 
ent markets  for  investments  is  imperfect,  and  the  adjustment 
between  them  of  the  rates  of  discount  on  future  incomes  is 
always  more  or  less  incomplete. 

In  the  next  chapter  we  shall  see  how  the  various  kinds  of 


272  TIME-VALUE  AND  INTEREST  [Pt.  IV 

monetary  incomes  are  capitalized  in  the  business  world,  how 
thus  continuously  a  price  on  investments,  or  rate  of  return, 
prevails,  and  expresses  a  ratio  of  exchange  between  present 
and  future  capital  (and  incomes)  in  the  market. 


CHAPTER  23 
CAPITALIZATION  OF  MONETARY  INCOMES 

§  1.  Buying  with  money.  §  2.  Capitalization  of  agricultural  land- 
incomes.  §  3.  Years'  purchase  and  rate  of  income  on  capital.  §  4.  Price 
and  rate  of  income.  §  5.  Bonds  and  mortgages  as  saleable  incomes. 
§  6.  Price  of  variable  terminable  incomes.  §  7.  Depreciation  funds.  §  8. 
Corporate  securities.  §  9.  Capital  value  of  public  franchises.  §  10.  In- 
comes sold  in  perpetuity.     §  11.  Bonds  with  fixed  maturity. 

§  1.  Buying  with  money.  Where  money  is  used  the 
usual  case  is  that  of  the  sale  of  one  good  for  money,  which 
is  then  spent  for  another  good.  In  all  these  trades  time-pref- 
erence is  only  one  factor  helping  to  fix  the  price,  but  the 
important  thing  to  note  is  that  it  always  is  a  factor  and  is 
logically  and  practically  a  matter  for  separate  consideration. 
Wherever,  to-day,  there  is  a  business  income  that  has  a 
market-value,  that  may  be  bought  and  sold,  it  may  be  capi- 
talized. Men  compete  in  the  purchase  of  income-yielding 
agents.  There  is  a  continual  contest  in  judgment  among  in- 
vestors to  secure  the  largest  return  for  the  smallest  outlay. 
On  the  other  hand,  the  owners  of  any  income  strive  to  secure 
the  largest  capitalization  for  it  that  they  can.  Buying  as 
cheaply  as  they  can  the  present  goods  they  need,  and  selling 
as  dearly  as  they  can  the  future  goods  they  offer,  each  man  fits 
his  valuation  to  the  market.  In  any  market  the  individual 
finds  an  established  price  (Chapter  7,  section  6)  and  all  he  can 
do  is  to  buy  or  to  refuse  to  buy,  sell  or  refuse  to  sell,  at  that 
price.  A  trader's  valuation  may  be  such  that  he  is  an  included 
buyer  at  one  price,  and  at  another  price  he  ceases  to  buy  and 
begins  to  sell. 

§  2.    Capitalization  of  agricultural  land-incomes.    An  in- 

273 


274  TIME-VALUE  AND  INTEREST  [Pt.  IV 

teresting  example  and  one  of  great  historical  importance,  show- 
ing the  capitalization  of  a  series  of  incomes  looked  upon  as 
perpetual  and  uniform,  is  agricultural  land  of  western  Eu- 
rope since  the  latter  part  of  the  Middle  Ages  when  money 
Jiad  come  into  more  general  use.  Suppose  the  annual  net  in- 
come is  $1000  (after  deducting  from  rents  all  repairs,  taxes, 
and  other  costs)  and  every  one  believes  that  it  will  con- 
tinue at  that  amount  indefinitely.  The  ownership  of  the  es- 
tate represents  the  right  to  this  annuity,  and  whatever  price  is 
paid  for  the  ownership  is  the  price  of  the  whole  series  of  in- 
comes. As  the  series  of  incomes  is  looked  upon  as  perpetual, 
if  the  future  rents  were  to  be  counted  as  if  they  were  already 
present,  with  no  discount  on  their  future  value,  the  capital 
sum  would  be  infinite.  On  the  other  hand,  if  the  ownership 
is  worth  nothing  just  after  a  rent-payment  when  no  more 
rents  are  due  for  a  year,  the  discount  on  the  future  rents  would 
be  100  per  cent.  Evidently  either  extreme  is  impossible,  and 
as  a  fact  of  observation,  just  such  purchases  are  made  every 
day  at  a  finite  price  bearing  a  pretty  regular  relation  to  the 
amount  of  the  annual  income.  The  practice  is  plainly  indi- 
cated by  the  phrase  in  which  the  price  for  land  is  spoken  of 
still  in  England  and  the  continental  countries — a  phrase  un- 
familiar to  American  ears — as  a  certain  number  of  "years' 
purchase. "  If  an  estate  is  sold  for  twenty  or  thirty  times  the 
annual  net  rental,  it  is  said  to  be  sold  at  twenty  or  thirty 
"years'  purchase,"  as  the  case  may  be.  This  does  not  mean 
that  the  rental  for  twenty  years  only  is  sold,  but  that  the  rental 
in  perpetuity  is  sold  for  twenty  times  the  annual  rent ;  that  is, 
the  land  is  sold  outright  for  the  amount  of  twenty  years'  rent 
paid  at  once.  The  estate  is  looked  upon  primarily  as  pro- 
viding a  fixed  income ;  the  value  of  the  permanent  possession 
of  the  estate  is  thought  of  as  a  certain  number  of  times  the 
value  of  the  income  secured.  "Years'  purchase"  means, 
therefore,  the  length  of  time  required  for  the  incomes  to 
amount  to  the  purchasing  price. 
§  3.    Yeajs'  purchase  and  rate  of  income  on  capital.    Now 


Ch.  23]       CAPITALIZATION  OF  MONETARY  INCOMES  275 

at  ten  years'  purchase  every  piece  of  property  yields  10  per 
cent  on  the  capital  invested  (purchase  price  $10,000,  annual 
income  $1000)  ;  at  twelve  years'  purchase  8%  per  cent;  at 
twenty  years'  purchase  5  per  cent;  at  twenty-five  years'  pur- 
chase 4  per  cent,  etc.  Increase  in  the  number  of  years'  pur- 
chase involves  a  reciprocal  decrease  in  the  rate  of  return 
which  the  original  investment  of  capital  will  yield;  that  is, 
one  divided  by  the  years  gives  always  the  rate  per  cent  of 
income,  .10,  .083,  .05,  .04,  etc.  The  arithmetic  process  is  the 
simple  one  of  aliquot  parts.  The  number  of  years'  purchase 
expresses  a  ratio  of  capitalization,  thus :  a :  P : :  1 :  10,  ten  years' 
purchase  being  a  low  ratio  and  40  years'  purchase  a  high 
ratio.  Corresponding  with  this  is  a  rate  of  annual  premium  at 
which  the  price  a  year  distant  will  appear  in  comparison  with 
present  price,  the  difference  being  a  net  income ;  thus,  present 
principal  is  to  future  principal  plus  a  year's  income  as  100 
is  to  105,  the  rate  being  .05.^ 

Whatever  the  rate  is,  it  is  an  arithmetical  fact,  entirely  in- 
dependent of  any  calculation  by  purchaser  or  lender,  but 
necessarily  resulting  whenever  the  property  changes  hands  at 

1  The  rate  of  premium  is  reckoned  on  the  basis  of  present  worth  as 
100.     This  rate  ia  ordinarily  used  to  discount  the  future  by  dividing 

the  future  income  by  the  rate  plus  1.  P  =  — p-  =  r^.  To  express 
the  true  rate  of  discount  on  the  future,  however,  the  future  value 
must  be  taken  as  a  basis  of  100;  discount  is  proportional  to  premium,  as 
present  vrorth  is  to  future  worth;  thus  p  :  f  : :  100  :  105  : :  95.238  :  100 
: :  4.762  (the  rate  per  cent  of  discount)  :  5  (the  rate  per  cent  of  pre- 
mium). As  a  matter  of  convenience  in  business  practice,  the  rate  of 
premium  (which  becomes  an  interest  rate)  is  generally  employed  in  all 
banking,  insurance,  annuity,  forestry,  and  other  problems,  and  when 
used  as  a  divisor,  in  the  manner  just  explained,  is  for  convenience 
spoken  of  as  the  rate  at  which  the  sums  are  "discounted";  e.g.,  in  the 
next  paragraph  of  the  text.  In  the  well-known  method  of  bank  dis- 
count, however,  the  premium  (interest)  rate  is  used  as  a  multiplier, 
the  interest  being  simply  taken  out  in  advance  and  the  borrower  re- 
ceiving a  smaller  sum  than  that  nominated  in  the  note.  This  is  equiva- 
lent to  charging  him  interest  at  a  somewhat  higher  rate,  as  interest 
ordinarily  is  payable  at  the  end  of  the  year.     See  ch.  25,  note  2. 


276  TIME-VALUE  AND  INTEREST  [Pt.  IV 

any  price.  Another  arithmetical  fact  is  that  this  rate  of  yield 
is  that  at  which  the  annual  income  of  a  perpetual  uniform 
series  must  be  compound-discounted  to  produce  the  cap- 
ital sum;  that  is,  a  perpetual  series  of  $1000  discounted  at 
10  per  cent  gives  a  present  worth  of  $10,000,  or  ten  years' 
purchase ;  a  perpetual  series  of  $1000  discounted  at  5  per  cent 
gives  a  present  worth  of  $20,000,  or  20  years'  purchase.  The 
rate  at  which  a  perpetual  series  is  compound-discounted 
to  purchase  a  capital  sum  is  always  the  rate  of  simple  interest 
the  investment  will  yield,  and  vice  versa.  The  present  income 
is  worth  most,  next  year's  less,  and  so  on  in  a  decreasing 
series.  "Whatever  the  rate  prevailing,  incomes  infinitely  dis- 
tant became  infinitesimally  small  when  compound-discounted. 
The  formula  is  P=  —  when  P  is  the  present  worth  of  all 
the  incomes,  a  is  the  perpetual  annuity,  and  r  the  rate  per 
cent;  e.g.,  20,000=  ^;  this  is  equivalent  to  r  =  -^;  that  is, 
the  rate  at  which  the  future  incomes  are  capitalized  is  the 
annuity  divided  by  the  capital  sum ;  e.g.,  .05  =  ^^ 

§  4.  Price  and  rate  of  income.  It  may  be  shown  by  a  price 
diagram  how  every  price  arithmetically  involves  a  correspond- 
ing rate  of  premium  on  the  present  price  (investment  of  cap- 
ital) which  will  be  unfolded  as  an  income  to  the  investor. 
Take  the  case  of  a  house  affording  a  net  rent  to  the  owner  of 
$100  a  year  (after  allowing  for  taxes,  costs,  depreciation). 
The  price  of  the  series  of  incomes  is  the  amount  at  which  the 
bids  are  brought  to  equilibrium,  the  marginal  bidders  being 
those  just  ready  to  drop  out  of  the  market  if  a  slight  change 
is  made.  This  reflects  the  rate  of  time-preference  in  the  indi- 
vidual economy,  showing  itself  in  the  whole  state  of  improve- 
ment and  depreciation  of  agents  in  the  possession  of  each  man. 
B  will  prefer  to  rent  so  long  as  the  house  is  priced  at  $2000 
(involving  a  rate  of  5  per  cent)  but  prefers  tc  buy  when  it  is 
priced  at  $1800,  a  discount  of  5.55  per  cent.  The  expression 
of  the  price  of  time  as  a  percentage  is  merely  a  convenience. 

§  5.    Bonds  and  mortgages  as  saleable  incomes.    The  mod- 


Ch.  23]        CAPITALIZATION  OF  MONETARY  IN(X)MES 


277 


3i% 


-    4% 


1000  --o- 


6§% 


10% 


zo% 


Pig.  37.     Peice   and    Rate   of   Yield   on   Invest- 
ment, Annual  Income  Being  $100.* 


ern  corporation  bond 
is  a  promise  to  pay 
an  annual  sum,  ex- 
pressed as  a  percent- 
age of  the  principal, 
and  to  repay  the 
principal  at  the  defi- 
nite date  of  ma- 
turity. A  twenty 
year  5  per  cent  bond 
for  $1000  thus  is  a 
promise  to  pay  19 
annual  incomes  of 
$50  at  the  end  of 
each  year  (but  see 
note  below)  and  one 
payment  of  $1050  at  the  end  of  the  twentieth  year.  It 
could  as  well  be  termed  a  20  payment  $50  a  year  bond  with 
a  maturing  value  of  $1000,  without  mentioning  a  rate  of  in- 
terest. The  rate  it  truly  yields  the  investor  depends  on  the 
price  he  pays,  which  is  fixed  by  market  conditions.  Such  a 
bond  does  not  necessarily  sell  at  par  (its  denomination)  ;  usu- 
ally it  sells  at  a  premium  or  at  a  discount.  The  investors 
treat  a  bond  as  so  many  incomes  distributed  at  certain  points 
of  time,  and  bidding  in  the  market  fixes  the  market-price  for 
future  incomes  of  that  type.^  A  note  secured  by  real-estate 
mortgage  is  like  the  bond,  but  not  so  marketable,  and  is  ordi- 

*  This  shows  graphically  that,  the  net  yield  of  a  durative  agent  being 
given,  every  possible  price  (capitalization)  arithmetically  corresponds 
with  and  involves  a  rate,  which  evolves  as  a  rate  of  income  on  the 
investment. 

2  In  most  cases  the  interest  on  bonds  is  payable  semi-annually  ( at  the 
end  of  each  six  months)  and  the  bond  tables  showing  the  "rate  of 
interest  realized  if  purchased  at  prices  named  and  held  to  maturity," 
otherwise  known  as  the  investment  yield,  are  usually  prepared  with  this 
condition  in  mind.  This  is  equivalent  to  a  slightly  higher  rate  of 
interest. 


278  TIME-VALUE  AND  INTEREST  [Px.  IV 

narily  held  by  the  same  investor  until  maturity.  It  usually 
(but  not  always)  is  bought  at  its  face  value  and  the  holder 
looks  upon  it  as  capital  to  that  amount.  But  as  it  is  not  pay- 
able until  the  date  named  as  maturity,  he  could,  if  he  wished, 
convert  it  into  ready  funds  before  it  is  due,  selling  it  at  the 
best  price  he  can  get,  which  may  be  above  or  below  par.  Thus 
a  ten  year  mortgage  for  $5000,  bearing  5  per  cent  interest, 
may  be  looked  upon  as  containing  nine  annual  payments  of 
$250  each  and  a  tenth  payment  of  $5250.  The  total  undis- 
counted  sum  of  all  the  payments  is  $7500 ;  and  if  the  mortgage 
is  bought  at  par  it  yields  an  annual  net  income  of  5  per  cent  on 
the  investment ;  if  bought  above  par  it  yields  an  income  of  less 
than  5  per  cent  (e.g.,  bought  at  $5406  it  yields  4  per  cent). 

This  is  a  good  illustration  of  what  is  meant  by  capital  as 
contrasted  with  wealth.  If  the  mortgaged  house  will  bring  a 
price  of  $10,000,  that  is  the  price  of  the  wealth ;  but  the  owner 
has  a  capital  of  $5000,  and  the  holder  of  the  mortgage  has  a 
capital  of  $5000 — ^which  together  are  the  total  value  of  the 
wealth. 

§  6.  Price  of  variable  and  terminable  incomes.  Cases  of 
entirely  uniform  and  perpetual  incomes  (even  in  expectation) 
are  very  rare.  Most  incomes  are  variable  and  terminable. 
These  are  capitalized  and  made  comparable  as  to  present  worth 
with  a  uniform  and  perpetual  series.  Incomes  may  change  in 
an  upward  direction,  more  or  less  regularly  from  year  to  year ; 
they  may  decrease  or  they  may  remain  the  same  for  a  series 
of  years  and  then  terminate  abruptly;  or  they  may  vary  by 
any  combination  of  these  changes. 

Especially  in  modern  times  real-estate  rentals,  formerly  the 
type  of  stability,  have  been  rapidly  altered  by  social  changes, 
and  so  far  as  these  changes  are  foreseen,  expected  rents  are 
made  the  basis  for  present  capitalization.  Investors  and 
owners  alike  may  foresee  that  a  piece  of  land  used  only  for 
agriculture  will,  within  a  few  years,  be  taken  up  for  city  lots, 
or  will  be  needed  for  a  factory  or  as  the  site  of  a  railroad  sta- 
tion.   A  vacant  lot  may  be  held  for  a  number  of  years  at  a 


Ch.  23]        CAPITALIZATION  OF  MONETARY  INCOMES  279 

good  price  while  yielding  nothing ;  in  this  case  the  incomes  are 
all  future,  and  the  capitalization  must  be  based  upon  the  pro- 
gressive series  expected,  beginning  at  zero.  In  some  cases 
the  physical  output  of  any  agent  may  decline  while  the  price 
of  the  product  increases,  the  resultant  being  perhaps  a  sta- 
tionary yield  or  an  increasing  one.  "When  foresters  foresee 
that  the  selling  price  of  the  timber  will  be  greater  twenty-five 
years  later  than  it  is  to-day,  and  they  estimate  the  future  yield 
of  the  forest  on  this  basis,  they  advise  expenditure  that  would 
be  unwise  if  present  prices  were  to  continue.  Again  when  the 
expected  series  of  incomes  is  declining,  as  the  royalties  secured 
from  mines,  being  certain  to  disappear  at  some  more  or  less 
calculable  date,  the  capital  value  of  the  mine  is  the  present 
worth  of  a  limited  and  degressive  series  of  incomes. 

The  value  of  a  short  series  may  be  calculated  by  simple  arith- 
metical methods,  and  more  easily  by  the  aid  of  a  table  of 
present  worth,  when  any  rate  of  premium  on  the  present  is 
assumed.  Suppose  the  rate  to  be  .05  and  the  incomes  expected 
are  as  follows :  at  the  end  of  the  1st  year,  100,  of  the  2nd  year 
75,  of  the  3d  year  50,  then  ceasing.  The  present  worth  is  the 
™"'.  (S-,+<ilp+(  Ji;  =  95-238  +  68.027  +  43.192  =  $206.46, 
Again  it  must  be  observed  (see  Chapter  22,  sections  8,  9)  that  if 
the  price  is  $206.46  it  mathematically  involves  the  rate  of  5  per 
cent,  quite  independent  of  any  thought ;  the  calculation  merely 
reveals  and  expresses  exactly  a  rate  inherent  in  the  transaction. 

§  7.  Depreciation  funds.  As  a  matter  of  practice  the 
more  difficult  calculations  of  variable  and  terminable  annuities 
are  avoided  by  investors  by  taking  the  perpetual  uniform  series 
of  incomes  as  the  standard  with  which  all  the  other  series 
may  be  made  comparable.  They  treat  the  original  cap- 
ital invested  as  a  sum  to  be  kept  intact  to  be  reinvested.  The 
payments  at  the  end  of  each  year  are  treated  as  gross  income 
to  be  divided  between  a  depreciation  fund  sufficient  to  main- 
tain the  capital  unimpaired  at  the  end  of  the  period,  and  net 
income  which  may  either  be  spent  or  be  saved  (reinvested  as  an 
additional  capital) .    In  all  bonds  bought  above  par  the  amount 


280  TIME-VALUE  AND  INTEREST  [Px.  IV 

to  be  treated  as  a  depreciation  fund  is  larger  in  proportion  to 
the  nearness  of  the  maturity  of  the  bond,  and  in  turn,  the  more 
distant  the  date  of  maturity  the  higher  the  present  price  of 
a  bond  bought  or  sold  above  par.^  This  method  of  calculating 
the  capital  investment  as  equivalent  to  a  fixed  sum  of  money 
is  convenient,  especially  in  distinguishing  between  income  and 
principal.  When  losses  are  great  they  fall  upon  capital,  and 
the  income  is  a  negative  quantity.  When  prices  of  bonds  rise, 
the  income  is  larger  than  was  expected,  and  (unless  taken 
out  in  some  way)  is  by  a  mere  bookkeeping  process  counted 
as  added  to  the  capital,  and  the  rate  of  income  thereafter  is 
reckoned  on  a  higher  basis  of  annual  investment.* 

§  8.  Corporate  securities.  Corporations  are  business  enter- 
prises which  issue  stock,  or  certificates  of  a  share  in  their 
ownership  and  income.  Doubtless  the  convenience  of  the  sale 
and  transfer  of  invested  capital  by  the  use  of  stock  has  been 
one  of  several  reasons  for  the  large  increase  of  this  form  of 
organization  since  the  beginning  of  the  nineteenth  century. 
Originally  the  stock  of  a  company  taken  collectively  repre- 
sented all  the  capital  invested,  and  each  share  entitled  the 

8 E.g.,  in  a  circular  issued  in  1908  prices  were  quoted:  "$100,000 
City  of  Boston  registered  4  per  cent  bonds,  due  June  1,  1928,  price 
106%,  yielding  3.55  per  cent;  same  kind  due  June  1,  1938,  price  IO814 
yielding  3.55  per  cent;  same  kind  due  June  1,  1948,  price  IO91/2.  yield- 
ing 3.55  per  cent."  The  gross  yearly  income  is  $4000,  of  which  but 
$3776.31  would  be  treated  as  net  income,  and  $223.69  would  have  to  be 
reinvested  each  year  to  leave  the  capital  undiminished  at  the  end  of 
the  period  for  which  the  bonds  run.  The  opposite  is  necessarily  the  case 
with  bonds  bought  at  a  discount,  the  rate  of  net  income  on  the  invest- 
ment being  somewhat  larger  than  the  percentage  that  the  annual  pay- 
ment is  of  the  par  value. 

*  The  practice  of  counting  the  capital  as  equal  to  a  fixed  sum  of 
money  has  suggested  to  some  the  idea  that  capital  is,  in  its  very  nature, 
a  permanent  quantity  of  value.  But  this  is  an  illusion,  for  the  "sum 
of  value"  may  be  both  increased  and  diminished,  and  may  be  utterly 
swept  away.  Capital  is  no  more  than  the  bookkeeping  expression  of 
the  present  worth  of  a  person's  control  over  income,  definite  at  the 
moment  that  the  first  investment  has  been  made,  and  thereafter  merely 
an  estimate,  until  the  property   (right)   is  again  sold  at  a  price. 


Ch.23]       capitalization  of  monetary  incomes  281 

owner  to  a  given  portion  (called  a  dividend)  of  the  total  in- 
come earned.  The  shares  are  issued  in  regular  denominations 
in  terms  of  money ;  this  amount  expressed  on  the  face  of  the 
share  is  the  so-called  nominal  value,  or  par  value,  or  face 
value.^  But  as  a  business  proves  more  or  less  profitable,  the 
value  of  a  share  of  its  income  rises  and  falls  regardless  of  the 
nominal  amount  of  stock  issued.  At  once  there  is  a  divergence 
between  the  denomination  and  the  market-price  (often  called 
value)  of  the  stock.  The  nominal  amount  of  stock  is  rela- 
tively permanent,  the  same  year  after  year;  it  may  be  in- 
creased by  further  issues,  or  it  may  be  decreased  by  cancel- 
ation after  purchase  with  funds  in  the  corporation's  treasury. 
But  when  stock  is  the  only  form  of  claim  on  the  earnings  that 
is  issued,  the  fluctuations  of  the  market-price  of  the  stock 
record  the  market's  judgment  of  the  business;  that  is,  its 
expected  dividends  capitalized  at  a  market-rate  for  investments 
of  that  grade  of  safety. 

But  in  present  practice  there  are  several  forms  (of  which 
stock  is  but  one)  in  which  corporate  incomes  are  marketed 
and  in  which  an  investor  may  buy  a  share  in  the  earnings  of 
the  business.  Bonds,  representing  money  loaned  to  a  company 
and  entitling  their  holder  to  regular  interest  payments,  hold 
legal  priority  to  the  claims  of  any  variety  of  stock.  They 
usually  do  not  give  their  owner  a  vote  in  the  management  or 
make  him  in  the  technical  sense  a  part  owner  in  the  business. 
Next  stands  preferred  stock,  which  entitles  the  owner  to 
share  first  in  the  dividends,  if  there  are  any;  and  finally  the 
common  stock,  which  gets  a  share  only  when  the  other  claims 
are  satisfied.  All  of  these  are  called  corporate  "securities," 
tho  they  are  in  many  cases  far  from  "secure,"  in  the  sense 
of  being  free  from  risk.  By  the  multiplication  and  further 
variation  of  these  readily  saleable  claims  on  industrial  incomes, 

8  This  is  an  unfortunate  use  of  the  term  value.  It  would  be  better 
to  speak  of  the  amount  of  a  single  share  as  the  denomination,  and  of 
the  product  of  the  denomination  by  the  number  of  shares  outstanding 
as  the  nominal  amount  of  stock. 


282  TIME-VALUE  AND  INTEREST  [Pt.  IV 

the  investors'  desires  are  met  more  fully  and  with  greater 
precision,  and  correspondingly  the  corporations  more  con- 
veniently obtain  the  funds  needed. 

§  9.  Capital  value  of  public  franchises.  Franchises  for 
the  use  of  public  highways  by  railroad,  gas,  water,  and  light- 
ing companies  enable  their  owners  to  get  incomes  which  can 
be  capitalized.  If  a  company  is  given  the  exclusive  right  to 
operate  in  a  locality  (with  use  of  streets,  alleys,  public  roads, 
and  the  right  of  eminent  domain  to  condemn  private  prop- 
erty) any  income  above  an  average  rate  of  return  on  the  in- 
vestment is  capitalized  either  in  the  higher  price  of  the  stock 
or  in  additional  stock  issued  without  additional  outlay  upon 
the  plant.  If  the  franchise  is  unlimited,  the  income  may  be 
capitalized  as  practically  perpetual;  if  the  franchise  is  lim- 
ited, and  is  to  expire  in  thirty  or  forty  years,  only  the  limited 
series  of  privileged  incomes  can  ordinarily  be  capitalized. 
When,  however,  the  managers  are  able  to  exert  influence 
enough  to  have  the  franchise  extended,  and  the  investors 
believe  in  the  skill  of  the  managers  to  influence  the  legis- 
lators by  fair  means  or  foul,  the  value  of  the  stock  continues 
higher  than  it  could  usually  be  under  a  limited  franchise. 
Such  circumstances  becloud  the  question  whether  the  excep- 
tional income  arising  under  the  franchise  should  go  to  the 
public  or  to  the  company.  The  important  question,  however, 
is  whether  the  company  is  entitled  to  the  income,  for  if  so,  the 
capitalizing  of  the  income  somehow,  as  is  done  in  every  other 
business,  is  inevitable. 

§  10.  Incomes  sold  in  perpetuity.  In  creating  any  in- 
come-yielding debt,  public  or  private,  the  seller  is  capitaliz- 
ing the  promise  of  regular  incomes  to  be  paid  to  the  buyer. 
It  is  not  essential  that  a  debt  agreement  should  call  for  the 
repayment  of  the  capital  sum  advanced  by  the  lender.  Many 
if  not  all  of  the  early  ** public  stocks"  were  in  form  promises 
to  pay  an  annual  income  perpetually  (without  specified  date 
of  maturity)  as  the  "British  consols"  (national  bonds)  are 
to-day.    They  sold  for  whatever  they  would  bring  in  the  mar- 


Ch.  23]        CAPITALIZATION  OF  MONETARY  INCOMES  283 

ket  as  a  means  of  borrowing  money.  They  could  be  redeemed 
and  canceled  onl^-^  by  purchasing  them  at  their  price  in  the 
open  market. 

The  sale,  in  the  Middle  Ages,  of  a  ** charge"  on  the  rents 
of  a  landed  estate,  called  a  "rent  charge,"  was  in  very  simi^ 
lar  form."  A  landowner,  wishing  money  to  go  on  a  crusade 
or  to  improve  his  estate  or  to  invest  in  some  other  business, 
sold  a  rent-paper  entitling  the  purchaser  to  receive  per- 
manently a  given  sum,  to  be  paid  out  of  the  rent  of  the  estate. 
The  debt  was  a  "charge"  upon  the  rent,  until  it  was  paid. 
The  seller  gave  up  the  right  to  retain  that  amount  of  rent  as 
it  came  in  year  by  year,  and  received  a  capital  sum  in  hand. 
Generally  he  had  the  right  to  repay  the  sum  whenever  he 
■wished  and  thus  extinguish  the  rent-charge.  Logically 
viewed,  the  purchaser,  in  buying  an  equitable  part  of  the 
income,  bought  an  equitable  part  of  the  rent-bearing  wealth. 
In  effect  it  was  just  like  a  loan  except  that  the  purchaser  of 
the  rent-charge  could  not  demand  the  repayment  of  his 
money.  He  could,  however,  sell  the  rent-charge  when  he 
wished  to  get  his  capital  out.  Gradually  it  became  usual  to 
sell  and  transfer  rent-papers  just  as  is  done  to-day  with 
mortgages  and  bonds.  Rent-papers  thus  came  in  the  fifteenth 
century  to  be  negotiable  paper  in  somewhat  general  use. 
There  was  a  rise  and  fall  of  the  value  of  the  rent-paper  with 
changes  in  the  demand  for  investment  in  rent-charges  or  with 
changes  in  the  security. 

§  11.  Bonds  with  fixed  maturity.  The  modern  public 
and  corporate  bonds  issued  by  nations,  states,  municipalities, 
and  corporations,  for  war,  public  buildings,  public  works, 
such  as  wharves,  canals,  water  supply,  etc.,  are  looked  upon 
by  both  the  borrower  and  the  lender  much  in  the  same  way  as 
were  the  old  annuities.  The  main  difference  is  that  the 
modern  obligations  promise  to  repay  a  stated  capital  after  a 
stated  number  of  years.  If  the  income  of  a  $1000  4  per  cent 
bond  (interest  payable  semi-annually)  running  for  20  years, 

8  See  ch.  14,  sec.  4. 


284  TIME-VALUE  AND  INTEREST  [Pt.  IV 

is  $40,  and  the  bond  sells  for  $900,  it  will  yield  an  income  of 
$40  each  year  for  19  years  and  an  income  of  $1040  the  25th 
year,  of  which  $900  equals  the  original  capital  invested,  and 
$100  is  the  increment  of  value  distributed  over  the  whole 
period.  Such  a  transaction  would  be  said  to  net  the  in- 
vestor 4.78  per  cent.  The  incomes  received  from  public 
bonds  are  paid  from  the  proceeds  of  taxation  and  are  a 
charge  on  the  rents  and  incomes  of  all  taxable  property ;  and 
the  incomes  received  from  bonds  of  industrial  and  public 
service  corporations  are  a  charge  on  the  earnings  of  the  en- 
terprises. 

Even  a  deposit  evidenced  by  an  interest  bearing  "certifi- 
cate of  deposit"  in  a  commercial  bank  or  in  a  savings  bank 
may  be  seen  to  have  this  same  character.  The  bank  is  the 
borrower,  exchanging  the  promise  to  pay  each  year,  or  half 
year,  or  quarter,  an  amount  of  interest  proportioned  to  the 
amount  deposited,  and  to  repay  the  capital  sum  on  certain 
agreed  conditions.  The  life  annuities  sold  by  insurance 
companies  preserve  very  closely  the  character  of  the  old  an- 
nuities and  rent-charges,  tho  the  annuity  that  can  be  bought 
for  a  present  payment  is  proportionately  larger  than  a  per- 
petual annuity,  because  the  number  of  payments  is  limited  to 
the  lifetime  of  the  purchaser. 


CHAPTER  24 
SAVING  AND  BORROWING 

§  1.  Abstinence  of  the  conservative  kind.  §  2.  Cumulative  abstinence. 
§  3.  Spenders  and  savers.  §  4.  No  common  standard  of  abstinence.  §  6. 
Saving  without  and  with  the  use  of  money.  §  6.  (Classes  of  borrowers. 
§  7.  Victims  of  mischance.  §  8.  The  chronic  improvident  borrower. 
§  9.  Premium  concealed  in  retail  prices.  §  10.  The  prodigal  borrower. 
§  11.  Students  and  apprentices.  §  12.  Becoming-owners  as  borrowers. 
§  13.  The  borrower  for  profit. 

§  1.  Abstinence  of  the  conservative  kind.  Abstinence 
is  the  name  of  that  faculty  of  mind  which  enables  present 
desires  to  be  subordinated  to  future  desires.  Abstinence 
(the  faculty)  expresses  itself  in  particular  acts  known  as 
abstaining,  or  as  saving.  Conservative  abstinence  is  that 
which  keeps  men  from  using  up  or  invading  their  present 
stock  of  goods,  and  cumulative  abstinence  is  that  which  im- 
pels them  to  add  to  that  stock.  There  is  no  sharp  dividing 
line,  no  abrupt  break,  between  these  two,  yet  on  the  whole 
they  differ.  Conservative  abstinence  is  a  quality  of  mind 
analogous  to  the  inertia  and  momentum  of  physical  matter, 
and  makes  men  resist  stubbornly  a  reduction  of  property,  of 
income,  and  of  an  accustomed  social  position,  even  when 
there  is  little  or  no  disposition  to  increase  or  advance  them. 
It  is  this  which  makes  nearly  all  men  think  that  using  up  any 
part  of  their  principal  (when  they  have  sold  property  or  have 
collected  loans)  is  a  very  different  thing  from  regularly  using 
up  their  free  income.  A  large  part  of  accumulation  results 
from  the  operation  of  conservative  abstinence.  Through 
insurance  for  one's  family,  purchase  of  annuities,  laying  up 
"for  a  rainy  day"  or  for  old  age,  etc.,  guided  by  the  con- 
servative quality  of  mind,  men  seek  to  maintain  (rather  than 

280 


286  TIME-VALUE  AND  INTEREST  [Pt.  IV 

to  increase)    the  standard  of  themselves  or  their  families. 

§  2.  Cumulative  abstinence.  Adding  to  wealth  at  the 
cost  of  a  present  lowering  of  long-accustomed  standards  of 
living  is  a  rare  occurrence;  but  in  a  large  number  of  cases 
where  there  is  no  deliberate  purpose  to  go  beyond  conserva- 
tive abstinence,  the  uncertainties  of  life,  insensible  changes 
in  the  habitual  standard  of  possession,  desire  to  leave  children 
a  larger  patrimony,  etc.,  tend  to  the  heaping  up  of  wealth  for 
heirs.  It  is  much  easier  to  accept  a  higher  than  a  lower 
standard  of  living.  Consequently,  deliberate  cumulative  ab- 
stinence is  most  likely  to  appear  at  favorable  times  in  the 
lives  of  men  of  rising  fortunes,  who,  while  maintaining  or 
even  increasing  their  scale  of  expenditure,  are  able  to  add  to 
their  riches.  Accumulation  comes  to  be  to  some  men  the  one 
game  they  can  enjoy.  I  recently  met  an  old  man  who  gener- 
ously was  bent  on  becoming  richer  so  that,  as  he  said,  his  at- 
tractive young  wife  might  get  a  second  husband  as  good  as 
her  first  one. 

Many  successful  business  men  evidently  are  accumulating 
not  because  of  a  desire  to  enjoy  more  material  income  them- 
selves, excepting  in  so  far  as  that  is  necessary  to  present  suc- 
cess or  is  the  evidence  that  they  are  succeeding  in  the  present. 
Business  has  in  it  always  something  of  the  character  of  a 
game,  and  the  game  can  not  be  won  unless  at  one  place  and 
another  the  resources  of  the  business  are  steadily  enlarged. 
The  older  inexpensive  equipment  must  be  replaced  by  newer 
and  more  costly,  the  stock  must  be  increased  and  the  build- 
ings enlarged,  if  the  business  is  to  maintain  its  place  among 
competitors  and  outstrip  them.  The  cumulative  abstinence 
in  such  cases  seems  to  be  but  an  outgrowth  and  result,  under 
favoring  conditions,  of  an  original  conservative  motive. 

Abstinence  of  either  kind  is  the  guardian  of  the  individ- 
ual's future  against  his  present  desires.  Upon  the  conserva- 
tive faculty  depend  the  preservation,  repair,  replacement, 
and  economic  use  of  our  environment;  upon  the  cumulative 
faculty  depend  largely  its  growth  and  betterment.     As  the 


Ch.  24]  SAVING  AND  BORROWING  287 

capital  values  in  a  community  are  many  times  as  great  as  the 
savings  in  a  single  year,  and  as  a  large  part  of  the  savings 
result  from  conservative  motives,  it  is  evident  that  the  pres- 
sure and  resistance  of  conservative  abstinence  against  present 
desires  must  be  steadily  many  times  as  great  as  that  exerted 
by  cumulative  abstinence, 

§  3.  Spenders  and  savers.  The  uniform  preference  for 
present  over  future  would  lead  a  Robinson  Crusoe  to  use  up 
and  wear  out  his  wealth,  and  to  apply  all  his  labor  to  present 
enjoyment,  even  on  the  penalty  of  future  misery.  On  the 
other  hand,  the  excessive  preference  for  the  future  over  the 
present  would  condemn  him  to  the  miser's  fate  of  misery 
and  starvation  in  the  midst  of  wealth.  Evidently  somewhere 
between  these  two  extremes  he  must  settle  upon  some  rule 
of  life  and  habit  of  choice  that  involves  a  ratio  of  exchange 
of  present  and  future  uses.  The  world  is  made  up  of  peo- 
ple each  with  his  habit  of  choice,  not  absolutely  fixed,  slowly 
changing  with  years,  with  education  and  with  circumstances, 
and  occasionally  broken  into  by  impulse.  Members  of  fam- 
ilies and  of  groups  show  some  likeness  in  their  habits  of  choice. 
Each  one  having  separate  control  over  incomes  through  the 
institution  of  private  property,  is  able  to  maintain  his  own 
standards.  It  is  a  matter  of  degree,  ranging  from  those 
who  spend  all  they  can  get  hold  of,  to  those  who  save  nearly 
all.  Thus  at  any  time  the  community  is  made  up  of  those 
who  are  spending  more  than  their  incomes,  those  who  are 
spending  just  up  to  their  incomes  (the  large  class  of  con- 
servative abstainers),  and  those  who  are  spending  less  than 
their  incomes  (the  cumulative  abstainers).  This  psycholog- 
ical difference  between  abstainers  and  prodigals  varies  from 
one  person  to  another,  depending  on  natural  temperament, 
on  habit  bred  of  family  and  community  customs  and  train- 
ing, and  on  states  of  health  and  on  moods  affecting  the  appe- 
tites, the  imagination,  the  conscience,  and  the  will. 

§  4.  No  common  standard  of  abstinence.  It  must  not  be 
thought  tliat  any  two  men's  savings  in  terms  of  dollars  ex- 


288  TIME-VALUE  AND  INTEREST  [Pt.  IV 

press  the  comparative  degrees  of  abstinence,  sacrifice,  suffer- 
ing, deprivation,  etc.,  of  the  two  men.  A  poor  man  denies 
himself  many  simple  comforts  for  years  to  pay  $1000  for  a 
little  home ;  a  rich  man  may  be  able  to  buy  $100,000  of  bonds 
with  a  fraction  of  the  profits  of  a  rising  business  or  of  a  grow- 
ing income  from  investments  while  increasing  his  living  ex- 
penses in  all  directions.  It  is  absurd  to  suggest  that  the 
latter  has  abstained  a  hundred  times  as  much  as  the  former 
in  a  subjective  sense. 

It  might  seem  that  it  would  be  easier  for  a  well-fed,  well- 
clothed,  well-housed  man  to  exercise  abstinence  than  for  a 
hungry,  ill-clad  man  with  no  roof  over  his  head.  But 
neither  saving  nor  prodigality  is  regularly  related  to  any 
particular  state  of  fortune  or  is  found  exclusively  among 
either  rich  or  poor.  A  poor  peasant  living  on  the  most  meager 
fare  may  possess  in  high  degree  the  quality  of  abstinence 
which  is  entirely  lacking  in  the  rich  spendthrift.  A  man  well 
on  in  life  with  a  simple  standard  of  living  can  easily  save  a 
large  share  of  an  increasing  income. 

Abstinence  is  a  resultant  of  the  opposing  forces  of  de- 
sire in  the  one  man's  will.  Both  of  the  poor  man's  desires 
dependent  on  a  dollar  may  be  very  strong  (we  have  no 
psychic  standard  unit)  but  the  desire  for  present  enjoyment 
be  the  stronger;  whereas  both  the  rich  man's  desires  that  are 
dependent  on  a  thousand  dollars  may  be  very  weak,  yet  the 
desire  for  the  present  good  be  the  weaker.  Natural  differ- 
ences in  temperament  combine  with  education,  habit,  and  the 
imitation  of  prevailing  standards  to  make  desires  mild  or 
intense.  Saving  may  result  when  a  vivid  imagination  aids 
in  making  the  future  desire  stronger  than  present  strong  im- 
pulse; or  it  may  result  when  very  simple  tastes  fixed  by 
habit  are  combined  with  equally  habitual  and  unreasoning 
frugality.  The  magnitude  of  10  minus  8  is  greater  than 
that  of  100  minus  99.  Two  men's  powers  of  abstinence  can 
not  be  numerically  compared,  but  the  objective  results  ap- 
pearing in  the  amounts  saved  can  be  compared. 


Ch.  24]  SAVING  AND  BORROWING  289 

§  5.  Saving  without  and  with  the  use  of  money.  Ab- 
stinence of  the  conservative  sort  shows  its  results  in  keeping 
in  repair  and  providing  for  the  replacement  of  fertile  soil, 
ditches,  fences,  houses,  tools,  and  equipment  of  every  kind 
in  the  owner's  possession.  Much  of  this  does  not  need  to  take 
the  money  form,  but  much  of  it  does,  as  in  payment  of  wages 
and  purchase  of  materials  to  keep  up  repairs,  and  in  the 
laying  aside  of  a  depreciation  fund,  or  the  provision  of  insur- 
ance to  replace  the  agents  when  destroyed.  It  calls  for  posi- 
tive effort  on  the  part  of  the  owner  to  resist  treating  gross 
usance  and  receipts  of  his  fields,  tools  and  other  equipment 
as  a  disposable  income,  in  order  to  enjoy  a  more  bountiful 
present  at  the  expense  of  the  future.  In  many  ways  one  may 
"borrow  from  the  future"  without  borrowing  from  any  per- 
son (unless  it  be  one's  self). 

Abstinence  of  the  cumulative  sort  likewise  can  and  does 
in  large  measure  take  the  form  of  saving  in  kind  rather 
than  in  money.  One  has  but  to  dispose  of  his  labor  and 
wealth  so  as  to  use  in  each  period  less  than  the  full  net  income 
of  the  period  and  to  put  the  surplus  into  durable  forms  yield- 
ing future  incomes.  The  pressure  of  present  desire  is  so 
great,  and  so  many  unexpected  present  needs  crowd  upon 
men,  that  few  find  it  possible  or  think  it  possible  to  save 
much  in  this  way,  and  fewer  still  find  it  easy. 

"When  incomes  are  received  in  money,  saving  usually  takes 
that  form.  Every  clear  dollar  of  money  income  (after  pro- 
viding for  the  maintenance  of  the  principal)  is  disposable 
either  as  present  enjoyment  or  as  savings  to  constitute  a  new 
capital.  This  may  be  done  by  buying  labor  and  materials 
to  build  new  agents,  "adding  barn  to  barn,"  or  it  may  be 
by  buying  other  durative  direct  agents,  as  a  house  to  live  in 
where  one  has  been  paying  rent,  or  it  may  be  by  buying  dura- 
tive indirect  agents,  as  a  horse  and  plow  which  one  has  had 
to  hire  for  use  in  his  own  fields.  Or  the  money  may  be  used 
to  purchase  a  factory,  or  to  hire  laborers  and  to  buy  materials 
to  create  a  new  industry. 


290  TIME- VALUE  AND  INTEREST  [Pt.  IV 

A  large  part  of  money  savings,  however,  takes  the  con- 
tractual form.  The  saver  may  take  out  an  insurance  policy. 
He  may  deposit  in  a  savings  bank  (or  commercial  bank  with 
a  savings  department)  and  get  from  2  to  4  per  cent 
interest,  the  bank  in  turn  buying  bonds  of  corporations,  or 
making  loans  on  mortgage  security  at  a  higher  rate  of  in- 
terest. He  may  loan  to  a  business  man  or  to  a  house  builder, 
taking  notes  and  mortgages,  or  he  may  buy  bonds  and  mort- 
gages from  a  corporation.  In  all  these  cases  the  money 
loaned  is  transferred  to  another,  and  if  wisely  invested,  will 
produce  new  incomes.  Money  saved  can  be  made  to  yield 
an  income  only  by  being  spent — that  is,  invested  in  some 
way.^ 

§  6.  Classes  of  borrowers.  A  distinction  is  usually  made 
according  to  the  purpose  of  the  borrower,  between  two  main 
classes  of  loans:  consumptive  and  productive  loans.  Con- 
sumptive is  the  adjective  usually  applied  to  a  loan  made 
for  the  direct  use  of  one's  self  (or  of  one's  dependents).  It 
is  borrowing  by  a  spender,  and  virtually  undoes,  negatives, 

1  Some  reservoirs  of  small  savings  in  the  United  States  in  1914  are 
here  indicated. 

Savings  bank  a  depositors,     11,100,000  c;  deposits $  5,000,000,000 

Postal   savings,   deposits    50,000,000  b 

Building  &  L.  Asso.  members  2,800,000  c;   assets 1,250,000,000 

Insurance  (assessment)  policy  holders  8,800,000  c ;  assets         195,000,000 
Insurance,  ordinary  and  industrial  policy  holders  38,- 

200,000  c ;    assets    4,700,000,000 

Total    $11,195,000,000 

a  Do  not  include  savings  departments  or  interest-bearing  time  de- 
posits of  commercial  banks,  which  doubtless  are  large. 

b Estimated;  postal  savings  in  the  United  States  have  been  increas- 
ing at  the  rate  of  about  $1,000,000  a  month  since  the  beginning  of  the 
postals  savings  plan  in  January,  1911. 

cThe  same  person  may  be  counted  more  than  once  in  these  statistics. 
It  is  estimated  (by  Le  Moniteur  des  Int(5reta  mat^riels)   that  the  net 
additional  issues    (i.e.,  not  including  conversions)    of   securities    (cor- 
porate and  public)  in  the  world  between  1896  and  1913  was  as  follows — 

3  years,   1896-1898,  average $1,700,000,000  yearly 

6   years,    1899-1904,   average 2,000,000,000  yearly 

3   years,    19O.'5-1907,   average 3,100,000,000  yearly 

18  years,   1908-1913,  average 4,000,000,000  yearly 


Ch.  24]  SAVING  AND  BORROWING  291 

the  act  of  the  ahstainer.  This  was  almost  the  only  kind  of 
borrowing  before  the  development  of  modern  money  mar- 
kets. Among  the  many  varieties  of  circumstances  in  real 
life  several  types  of  consumptive  borrowers  are  distinguish- 
able: (1)  the  victim  of  chance,  (2)  the  chronic  improvident, 
(3)  the  prodigal,  (4)  students  or  apprentices,  and  (5)  ab- 
staining users,  or  becoming-owners. 

§  7.  Victims  of  mischance.  Some  kinds  of  misfortune 
are  comparatively  rare,  are  difficult  if  not  impossible  to  pro- 
vide against,  and  fall  with  overwhelming  weight  upon  the 
unprepared  victim.  Such  misfortunes  are  fires,  floods,  hur- 
ricanes, earthquakes,  failure  of  crops  through  drought,  ex- 
cessive rain,  pests,  hail  and  windstorms ;  such  are  bodily  acci- 
dent through  burns,  cuts,  falls,  crushing  weights  and  strains, 
which  partially  or  completely,  temporarily  or  permanently, 
disable  from  labor,  or  cause  the  death  of  a  breadwinning  mem- 
ber of  the  family.  Such  also  are  many  industrial  accidents  as 
the  cutting  off  of  the  usual  employment  through  failure  of 
the  sources  of  materials,  loss  of  vessels  in  transit,  brigandage, 
war,  etc.  In  all  such  cases  the  victim's  condition  suddenly 
falls  below  the  accustomed  and  the  normal.  Sometimes  im- 
mediate food,  fuel,  and  clothing  are  a  necessity  of  bare  exist- 
ence. One  standing  face  to  face  with  starvation  can  not  be 
worse  off  a  year  hence;  nearly  always  there  is  some  ground 
to  hope  that  if  the  present  misfortune  can  be  relieved,  fate 
will  be  kinder  in  future.  One  who  expects  to  be  better  pro- 
vided in  the  future  will  choose  to  pay  a  premium  for  a 
loan.  When  the  present  misfortune  is  far  short  of  star- 
vation, and  is  but  a  certain  measure  of  inconvenience,  the 
same  kind  of  a  motive  exists,  tho  in  a  lesser  degree.  A 
loan  at  such  a  time,  it  must  be  remembered,  is  but  the  choice 
of  the  least  of  evils.  If  the  person  can  not  borrow  he  is 
tempted  to  increase  his  too  small  present  income  by  convert- 
ing, pledging,  or  selling,  his  control  over  future  income. 
He  may  do  this  at  great  cost  (equivalent  to  a  large  discount) 
by  treating  the  present  tangible  wealth  as  if  it  were  income, 


292  TIME- VALUE  AND  INTEREST  [Pt.IV 

eating  up  the  seed  corn,  and  neglecting  repairs  on  house  and 
field  and  tools.  Or  he  may  exchange  his  durative  wealth  to 
get  a  larger  present  control  of  enjoyable  goods.  This,  at  a 
forced  sale  or  in  an  unfavorable  market,  he  can  do  only  at 
low  prices,  much  lower  than  must  be  paid  to  replace  them.^ 

To  one  faced  with  such  a  choice  the  pawnbroker  with  his 
exacting  terms  must  at  the  moment  appear  as  a  benefactor. 
He  has  not  created  the  distress;  he  appears  to  offer  the  best 
way  out  of  it.  A  defect  of  this  alternative  is  that  the  loan 
is  not  made  in  a  true  market.  There  exists  no  true  market 
for  making  such  loans.  The  necessitous  borrower  usually  is 
forced  to  make  an  isolated  trade  where  he  is  in  no  position 
to  higgle,  where  he  must  make  the  utmost  concession  to  a 
hard  bargainer.  Such  opportunities  attract  and  develop  a 
class  of  grasping  usurers,  "the  loan  sharks,"  who  hold  the 
victims  of  chattel  mortgages  in  a  veritable  serfdom.  The 
hard  bargain  is  made  still  harder  by  other  arbitrary  and  dis- 
honest exactions  for  renewing  the  loan.  Tho  the  object 
pledged  may  be  of  little  value  to  others,  it  often  has  a  per- 
sonal and  sentimental  value  (as  an  heirloom  or  a  keepsake) 
so  that  the  borrower  will  make  great  efforts  to  prevent  its  for- 
feiture. 

§  8.  The  chronic  improvident  borrower.  Another  type 
of  necessitous,  would-be  borrower  is  the  chronic  improvident. 
Not  only  mental  incompetents  and  drunkards,  but  many  hon- 
est families  live  always  near  the  border  of  want.  It  needs 
no  general  catastrophe,  or  no  very  unusual  bodily  or  in- 
dustrial accident,  to  reduce  them  to  distress.  Such  persons 
and  families,  it  must  be  remembered,  are  always  outside  of 

2  Such  cases  of  dire  necessity  are  in  primitive  communities  usually 
relieved  by  a  neighbor  as  a  friendly  duty,  without  charge,  tho  the 
borrower  is  under  moral  obligation  not  only  to  repay  the  loan  but  to 
render  like  friendly  accommodation  if  it  should  be  needed.  This  view 
long  continued  to  be  accepted  as  ethical,  and  charging  a  premium 
(interest)  on  loans  was  condemned  by  moral  and  religious  codes.  The 
Jews  (and  not  they  alone)  retained  the  prohibition  of  "usury"  among 
themselves,  but  permitted  "usury"  from  strangers. 


Ch.  24]  SAVING  AND  BORROWING  293 

the  normal  loan  market.  They  are  not  able  to  borrow  enough 
to  bring  their  rate  of  time-preference  into  uniformity  with 
the  market  rate  of  interest.  The  kind  and  amount  of  security 
(pledges  of  capital)  they  have  to  offer  is  not  acceptable,  small 
loans  to  them  involve  such  elements  of  risk  and  trouble,  that 
ordinarily  they  can  not  borrow  at  perhaps  double  the  prevail- 
ing market  rate.  Within  their  own  economies,  therefore,  all 
things  are  adjusted  to  a  high  rate  of  time-discount.  "When 
fortune  frowns  they  too  go  to  the  usurer,  taking  with  them 
the  best  pledge  they  can  offer.  An  artist,  now  successful, 
tells  that  he  and  his  wife  have  a  peculiar  affection  for  her 
engagement  ring,  because  it  paid  their  rent  so  many  times — 
to  the  pawn  shop  at  the  beginning  of  each  month,  and  back 
home  again  whenever  any  pictures  were  sold.  Some  strug- 
gling artists  and  inventors  as  well  as  gamblers  and  horsemen 
come  to  know  the  pawning  value  of  every  belonging — rings, 
stick-pin,  watch,  etc.  In  times  of  prosperity  their  saving 
takes  the  form  of  gold  ornaments  and  diamonds  (which  make 
good  pledges)  as  they  dare  not  trust  themselves  to  keep 
money  until  the  time  of  dire  distress.  A  struggling  student 
of  my  acquaintance  in  New  York  walked  twelve  miles  to  ex- 
change a  Mexican  dollar  (his  last  coin)  for  forty-four  cents 
with  which  to  buy  crackers.  A  very  high  rate  of  premium  on 
present  goods  was  involved  in  that  action.  The  fact  is  that 
even  the  most  improvident  and  ill-provided  families  have, 
involved  in  their  domestic  economies,  a  more  or  less  definite 
rate  of  time-preference,  and  only  when  the  pressure  of  present 
desire  greatly  increases,  do  they  bring  their  scanty  pledges 
to  borrow  money  as  the  best  way  to  adjust  their  incomes  in 
accord  with  their  time-choice.^ 

§  9.  Premium  concealed  in  retail  prices.  The  borrowing 
of  goods  without  agreement  to  pay  interest  usually  involves  a 
premium  on  present  goods.     The  high  rate  of  time-preference 

3  To  serve  this  class,  public  pawnshops  have  been  established  by  the 
governments  of  many  European  cities,  and  by  private  benevolence  in 
some  cities  of  America. 


294  TIME-VALUE  AND  INTEREST  [Pt.  IV 

among  the  chronically  improvident  is  the  foundation  of  the 
credit  system  in  retail  stores.  In  some  cases  mercliauts  will 
not  sell  cheaper  for  cash  than  for  credit,  for  fear  of  offend- 
ing their  main  body  of  credit  customers ;  but  there  are  good 
reasons  why  such  a  difference  should  be  made,  and  usually 
it  is  made  if  the  buyer  for  cash  quietly  urges  his  proposition. 
In  many  stores  there  are  two  appreciably  different  prices,  one 
for  "slow  pay,"  the  other  for  "spot  cash."  Some  stores 
specialize  on  the  slow  pay  customers  and  sell  on  the  instal- 
ment plan,  assuring  everybody,  "Your  credit  is  good  here." 
If  a  bill  paid  at  the  end  of  the  month  is  5  per  cent  more 
than  what  may  be  called  the  fair  cash  price,  the  difference  is 
equal  to  60  per  cent  per  annum  on  the  month's  average  ex- 
penditure. This  much  is  often  paid  by  perfectly  honest 
persons  for  the  privilege  of  postponing  payment.  If  a  man 
with  an  income  of  $50  a  month  is  always  behind  a  month,  and 
as  a  result  pays  5  per  cent  premium  on  his  purchases  over 
cash  prices,  he  is  losing  $2.50  a  month,  $30  a  year,  or  60  per 
cent  of  one  month's  salary,  the  amount  which  he  is  always 
in  debt.  Such  a  premium  is  paid  only  by  the  improvident, 
but  that  is  a  large  class  with  recruits  as  well  from  colleges 
as  from  factories.  Shopkeepers  are  forced  to  make  this  dif- 
ference to  earn  the  equivalent  of  interest  on  the  capital  thus 
invested,  and  to  recover  the  costs  of  bookkeeping  and  collec- 
tions, and  the  risk  and  loss  of  unpaid  bills.  The  high  rate 
paid  by  the  purchaser  becomes  only  a  low  net  rate,  on  the 
average,  to  the  shopkeeper.  The  economical  thing  for  the 
customer  to  do  would  be  to  retrench  expenses  rigorously  until 
he  "gets  $50  ahead"  and  is  able  to  pay  cash.  He  would  be 
able  to  use  this  so  as  to  increase  his  real  income  by  $30  worth 
of  goods  a  year;  and  meantime,  and  in  any  case,  he  could 
gain  $2,08  a  month  by  borrowing  $50  at  10  per  cent  interest 
(42  cents  a  month)  exorbitant  as  that  rate  seems,  and  paying 
cash  for  everything.  The  obstacle  usually  is  weakness  of 
will  power. 

The  notoriously  high  retail  prices  paid  by  the  poor  even 


Ch.24]  saving  and  BORROWING  295 

for  cash  purchases  when  made  in  very  small  quantities,  is  a 
penalty  of  the  same  kind  for  lack  of  a  little  capital.  They 
buy  a  pound  of  sugar  instead  of  a  dollar's  worth,  a  bucket- 
ful of  coal  instead  of  a  ton  at  a  time,  etc.,  a  practice  costly 
of  their  own  time  and  of  the  small  shopkeeper's  time  who 
must  get  higher  prices  to  make  a  bare  living  selling  in  that 
way.  The  time-premium  outgo  from  the  customer  is  usually 
not  a  corresponding  time-premium  income  to  the  merchant, 
but  merely  pays  for  services  and  other  store  expenses. 

Probably  we  should  class  as  examples  of  the  same  type 
of  loans,  on  a  large  scale,  those  made  by  governments  in  time 
of  war.  If  the  national  territory,  or  the  real  or  supposed 
national  interests  and  honor,  are  threatened,  the  citizens 
often  value  them  beyond  any  possible  money-price.  To  win 
they  are  ready  to  sacrifice  their  lives,  a  fortiori  they  are  ready 
to  sacrifice  a  part  of  their  material  fortunes.  The  immediate 
need  is  large  supplies  to  feed  soldiers  and  to  arm  them  with 
tools  to  burn,  batter,  and  blow  up  the  enemy.  High  rates 
of  interest  are  offered  by  the  government  and  large  obliga- 
tions are  assumed  for  the  future,  to  tempt  its  own  citizens  or 
those  of  foreign  states  to  furnish  the  money  to  buy  these 
supplies  and  instruments  of  destruction. 

§  10.  The  prodigal  borrower.  The  peculiarity  of  the 
prodigal  type  of  consumptive  borrower  is  in  the  artificial, 
self-indulgent,  subjective  character  of  the  desires  that  impel 
him  to  borrow.  He  has  capital,  relatively  a  good  deal  of  it. 
A  prodigal  usually  is  one  who  has  come  into  his  fortune  by 
chance — inheritance,  gambling,  a  lucky  stroke  of  business — 
and  therefore  is  without  discipline  in  thrift.  "With  a  habitual 
high  rate  of  time-preference,  he  comes  into  sudden  possession 
of  incomes  capitalized  at  a  low  rate.  He  is  impatient  at  the 
slowness  with  which  the  incomes  ripen,  and  he  takes  measures 
to  hasten  them  to  gratify  desires  long  latent,  and  now  up- 
springing,  often  in  a  favoring  atmosphere  of  flattery,  vanity, 
and  false  friendship.  Sometimes  he  meets  the  difficulty  by 
selling  some  property;  or  he  temporizes  and  borrows  money 


296  TIME-VALUE  AND  INTEREST  [Pt.IV 

with  a  vague  hope  that  some  way  may  be  found  to  retain  his 
property.  When  interest  is  10  per  cent,  a  promise  of  a  hun- 
dred dollars  a  year  gives  immediate  control  of  a  thousand 
dollars;  when  5  per  cent,  control  of  two  thousand  dollars. 
Lacking  business  experience  he  is  not  likely  to  find  the  best 
form  of  loan.  To  secure  an  immediate  loan  he  lightly  agrees 
to  pay  an  exorbitant  rate  of  interest  often  made  necessary 
by  the  prospect  of  his  financial  collapse.  It  is  clear  that  the 
high  rate  of  interest  he  pays  is  but  a  reflection  of  a  time- 
valuation  that  already  exists  in  his  mind.  The  net  result  of 
such  a  course  is  a  transfer  of  property  from  the  prodigal 
to  others,  a  wasteful  transfer  in  which  often  scheming  and 
avaricious  men  gain  unjustly,  and  often  the  savings  of  true 
abstainers  are  transformed  into  riotous  living  and  foolish 
display. 

§  11.  Students  and  apprentices.  We  come  now  to  some 
cases  of  consumptive  loans  with  a  more  provident  motive, 
that  of  increasing  the  future  earning-power  of  the  borrower. 
A  student  borrows  money  to  spend  for  food,  clothing,  text- 
books, tuition,  etc.,  needed  while  taking  a  course  in  college. 
When  he  borrows  he  has  little  earning-power,  but  with  that 
faith  in  himself  which  makes  the  young  American  so  interest- 
ing, he  pictures  himself  four  years  later,  sheepskin  in  hand, 
drawing  a  munificent  salary  with  which  he  can  easily  satisfy 
the  most  exacting  Shylock.  Apprentices,  young  lawyers 
waiting  for  clients,  physicians  slowly  gaining  a  practice,  busi- 
ness men  "working  up  trade,"  have  enough  faith  in  them- 
selves to  borrow  meantime  what  they  need  to  live  on.  They 
may  be  disappointed  and  suffer  loss,  but  hope  supplies  their 
motive  in  borrowing.* 

*  Especially  when  such  expenditure  for  self -improvement  is  directly 
in  industrial  lines,  as  learning  a  manual  trade,  or  a  profession  (as 
dentistry,  medicine,  engineering,  architecture,  etc.)  there  is  a  tempta- 
tion to  call  this  "an  investment  of  capital,"  or  a  capitalizing  of  man's 
earning  power.  But  that  is  merely  a  figure  of  speech,  tho  it  is  true 
that  the  outlay  for  utilitarian  training  is  made  in  order  to  increase  the 
earning  power  of  the  learner.    But  the   future  incomes   can   not   be 


Ch.24]  saving  and  borrowing  297 

In  this  type  of  consumptive  loans  we  see  a  very  different 
motive  from  the  former  types.  The  borrower  is  looking  to 
future  needs,  not  to  present  indulgence,  and  the  loan  is  use- 
less for  its  purpose  unless  he  supplements  it  with  a  true 
abstainer's  spirit,  adding  his  industry,  self-denial,  and  fore- 
thought to  attain  the  end  of  his  education.  This  type  of 
consumptive  loan  is  often  economically  better  than  one  to 
spend  upon  material  production. 

§  12.  Becoming-owners  as  borrowers.  The  fifth  type  of 
consumptive  borrower,  the  becoming-owner,  has  also  a  prov- 
ident motive.  He  borrows  not  in  order  to  consume  more 
wealth  than  he  otherwise  could,  but  in  order  to  pay  for  it 
by  a  different  method,  namely,  under  the  interest  contract 
instead  of  under  the  renting  contract.  To  do  this  he  borrows 
the  money  to  buy  the  agent  in  use,  and  becomes  its  owner. 
His  right  is  not  absolute  but  is  qualified  by  the  equity  of  the 
creditor  to  whom  the  property  is  pledged.  (Chapter  22, 
section  3.)  This  condition  might  continue  without  any  effort 
of  the  borrower  to  save  and  thus  reduce  the  debt;  but  so 
generally  is  this  kind  of  loan  prompted  by  motives  of  thrift 
and  made  in  anticipation  of  and  as  an  aid  to  saving,  that  such 
borrowers  deserve  to  be  called  abstaining  users. 

Of  this  type  are  purchases  on  credit  or  on  the  instalment 
plan  of  sewing  machines,  typewriters,  and  many  other  labor- 
saving  machines,  not  as  added  means  of  direct  enjoyment 
(such  as  are  automobiles,  canoes,  pianos)  but  as  better  means 
of  obtaining  direct  goods  without  the  sale  of  products.  Of 
this  kind  also  is  the  loan  to  build  a  house  for  the  borrower, 
or  to  buy  outright  anything  of  a  kind  already  used  by  him 
under  the  renting  contract  (as  a  farm  considered  as  a 
direct  good,  a  house  to  live  in,  a  source  of  food  for  the  family, 
etc.).  If  one  who  has  been  renting  house,  farm,  machine,  etc., 
ceases  to  rent  and  buys  under  the  interest  contract,  he  as- 
sumes a  new  responsibility  as  the  legal  owner  of  the  wealth, 

capitalized,  because  man  can  not  sell  himself  in  sum.    He  can  but  earn 
a  wage  or  salary  for  successive  services. 


298  TIME-VALUE  AND  INTEREST  [Pt.  IV 

but  often  he  reaps  a  beuefit  by  the  change.  The  gross  rent 
paid  by  a  tenant  (Chapter  15,  section  2)  must  include  not  only 
taxes  and  repairs,  but  something  to  cover  risk  of  bad  collec- 
tions, trouble  of  management,  damage  through  carelessness 
of  tenants,  etc.  Rent  of  a  good  grade  of  house  built  for  ten- 
ants "^  is  therefore  usually  10  per  cent  of  the  selling  price, 
and  not  infrequently  higher,  being,  it  is  said,  as  high  as  25 
per  cent  on  bad  tenements  where  risk,  damage,  and  trouble 
are  especially  great.  A  man  living  in  a  $2400  house  and  pay- 
ing $20  a  month  rent,  and  able  to  borrow  at  6  per  cent  could 
buy  the  house,  pay  $12  a  month  interest,  and  out  of  the  bal- 
ance of  $8,  after  paying  taxes  and  repairs,  have  something 
left  as  a  sinking  fund.  By  saving  a  few  dollars  more  each 
month  he  can,  within  a  few  years,  become  the  absolute  owner. 
His  pride  and  pleasure  as  an  owner  often  leads  him  to  add 
further  to  the  value  of  his  investment  by  making  improve- 
ments in  yard  and  buildings  which  he  would  not  make  as  a 
tenant. 

The  great  capital  in  the  building  and  loan  associations, 
over  a  billion  and  a  quarter  dollars  in  1914,  is  slowly  becom- 
ing the  absolute  property  of  the  borrowing  owners,  whose 
places  are  taken  by  others  thus  acquiring  homes.  This  capi- 
tal, large  as  it  seems,  is  but  a  fraction  of  the  amount  con- 
stantly being  acquired  in  this  way  by  owners  of  homes  mort- 
gaged to  savings  banks,  to  corporations  (universities,  philan- 
thropic endowments,  etc.)  and  to  private  lenders,  directly  or 
through  lending  agencies. 

§13.  The  borrower  for  profit.  The  term  "productive 
loan"*  has  generally  been  applied  to  the  borrowing  of  capi- 

5  This  proviso  "built  for  tenants"  is  significant,  for  houses  built  by 
well-to-do  owners  for  themselves  are  often  so  elaborately  finished  that 
they  are  notoriously  poor  investments  when  let  to  tenants. 

8  But  some  of  the  so-called  consumptive  loans  above  are  productive 
in  the  sense  which  we  recognize.  The  money  borrowed  to  build  a 
house,  to  buy  a  pump  to  supply  water,  or  a  machine  to  sew  cloth,  or 
even  an  automobile  to  produce  psychic  income  for  the  owner,  is  pro- 
ductive.   A  clearer  distinction  can  be  made  between  the  non-commercial' 


Ch.  24]  SAVING  AND  BORROWING  299 

tal  to  be  used  in  carrying  on  of  business  either  mercantile  or 
manufacturing — that  is,  in  buying  goods  to  sell  again.  The 
borroAver  is  a  middleman  whose  motive  is  to  get  a  "profit"  by 
sale  to  an  ultimate  user.  This  type  of  loan  must  be  more 
fully  discussed  in  connection  with  the  problem  of  enterprise 
and  profit,  and  only  the  briefest  indication  of  the  relation  of 
the  interest-rate  to  capitalization  need  here  be  given.  The 
borrower  expects  to  pay  the  interest  out  of  the  surplus  income 
(over  and  above  the  capital  investment)  which  the  sale  of  the 
products  will  put  into  his  hands.  This  success  in  getting  a 
surplus  large  enough  to  leave  him  a  balance  sufficient  to  pay 
interest  depends  on  his  investing  the  money  in  agents  not 
capitalized  too  high;  any  balance  of  profit  depends  on  his 
selecting  a  kind  of  agents  and  so  directing  their  use,  that  he 
can  make  them  earn  more  than  the  market  rate  of  interest. 

and  the  commercial  nature  of  the  products,  between  loans  by  ultimate 
users  of  the  goods  (the  occupant  of  the  house,  the  user  of  the  water 
from  the  pump,  etc.),  and  loans  by  middlemen  who  produce  to  sell 
to  ultimate  users. 


CHAPTER  25 
CAPITALIZATION  AND  INTEREST 

§  1.  Interest  subsequent  to  time-price.  §  2.  Origin  and  definition  of 
the  term  interest.  §  3.  Interest  versus  income,  or  gross  versus  net  in- 
terest. §  4.  Concealed  rate  of  interest.  §  5.  Commercial  paper.  §  6. 
Mercantile  cash  discounts.  §  7.  Long-time  loans.  §  8.  Special  markets 
for  money  loans.  §  9.  Capitalization,  the  clue  to  the  general  interest 
rate.  §  10.  Time-series  of  incomes,  monetary  and  non-monetary.  §  11. 
Present  dollars  and  what  they  can  buy.  §  12.  Blending  of  the  invest- 
ment premiums  into  a  common  rate.  §  13.  Indicative  nature  of  the  in- 
terest rate. 

§  1.  Interest  subsequent  to  time-price.  There  remains 
to  consider  that  form  of  a  price  for  time  which  is  most  prom- 
inent in  the  thoughts  of  men  in  the  business  world,  which 
therefore  often  is  the  only  form  that  is  recognized — namely, 
interest  on  a  loan  of  money,  or  on  credit  expressed  in  terms 
of  money.  The  buying  and  selling  of  anything  for  a  price 
expressed  arithmetically  was  very  unusual  until  some  form 
of  money  came  into  use;  and  this  was  particularly  true  of 
the  sale  of  timeliness  in  a  barter  economy.  The  loaning  of 
money  occurred  in  the  commercial  cities  of  ancient  times, 
but  for  a  long  period,  in  the  Middle  Ages,  was  very  unusual. 
The  practice  again  became  common  in  commercial  cities  of 
Europe  about  the  fifteenth  and  sixteenth  centuries.  The 
deepest  thinkers  from  Aristotle  (b.c.  384-322)  to  Thomas 
Aquinas  (1224r-1274  a.d.)  could  see  nothing  in  a  money-loan 
but  its  superficial  money-aspect,  nothing  of  its  underlying 
economic  nature,  and  they  studied  the  problem  only  as  one 
of  morals.  "When,  despite  all  the  disapproval  of  philo- 
sophic moralists  of  church  and  state,  the  practice  of  money 
loans  had  become  common  in  commercial  circles  in  cities,  the 

300 


Ch.  25]  CAPITALIZATION  AND  INTEEEST  801 

earlier  economists  began  to  attempt  an  explanation  of  the 
phenomena,  A  prevailing  rate  of  premium  on  money-loans 
appeared  only  where  money  was  in  use,  and  therefore  at  first 
was  deemed  to  be  peculiarly  connected  with  the  quantity  of 
money  in  the  country.  This  idea  still  widely  persists,  is 
indeed  the  naive  theory  of  every  mind  until  it  is  corrected 
by  some  economic  thought.  Some  economists  began  to  see 
that  the  rate  of  interest  on  money-loans  was  somehow  a  reflec- 
tion of  the  general  state  of  wealth  of  the  community,  and 
was  not  in  the  long  run  dependent  on  the  quantity  of  money 
in  the  community.  Behind  the  problem  of  the  rate  on  con- 
tractual loans  was  seen  to  be  a  more  fundamental  economic 
problem  of  value.  The  explanation  of  the  problem  was,  how- 
ever, still  begun  in  the  market  for  contractual  loans,  the  so- 
called  money  market.  "We,  having  studied  the  nature  of  time- 
preference  and  of  capitalization,  are  in  a  position  from  which 
to  view  money-loans  in  a  different  way,  and  to  see  them  in 
their  true  character  as  merely  forms  in  which  time-preference 
sometimes  appears  in  an  economy  where  money  is  in  general 
use  and  borrowing  is  common  in  commercial  affairs. 

§  2.  Origin  and  definition  of  the  term  interest.  The 
term  interest,^  applied  in  the  Middle  Ages  to  a  payment  for 
the  use  of  a  money  loan,  was  first  a  substitute  for  the  word 
usury.  It  was  intended,  by  indicating  that  the  lender  had 
something  involved  in  the  business,  to  soften  the  general  op- 
position of  the  church  and  of  public  opinion  to  such 
agreements. 

The  word  interest  will  be  here  defined  in  its  original 
meaning,  still  almost  universal  in  business  circles,  to  wit: 
Interest  is  the  amount  paid  and  received  according  to  a  con- 

1  The  economista  of  the  eighteenth,  and  early  part  of  the  nineteenth, 
century  gradually  broadened  the  term  to  include  any  income  attributable 
to  those  goods  generally  bought  and  sold  in  terms  of  money.  Later 
the  term  was  extended  to  include,  tho  never  consistently,  a  large  part 
of  the  problem  of  time-value,  the  nature  of  which  was  beginning  to  be 
seen, 


302  TIME-VALUE  AND  INTEREST  [rT.  IV 

tract  for  credit  given  in  terms  of  money.  Credit  is  the  post- 
ponement of  the  right  of  either  party  in  an  exchange  to 
require  immediate  delivery  of  the  price  agreed  upon.  The 
creditor  puts  faith  (credence)  in  the  promise  of  the  debtor. 
The  rate  of  interest  is  the  percentage  that  the  interest  (usu- 
ally for  one  year)  makes  of  the  principal.  The  principal  is 
the  amount  loaned  expressed  in  dollars  as  a  capital  sum  esti- 
mated apart  from  the  interest.  Interest,  in  this  sense,  always 
is  a  price,  and  not  simply  an  individual's  estimate.  Its 
amount  is  always  stipulated  by  a  contract  between  persons 
(expressed  or  implied,  as  either  the  customary  amount  or  the 
legal  amount  specified  by  statute  law).  The  interest  contract 
may  not  illogically  be  looked  upon  as  a  special  case  of  the  rent 
contract,  the  thing  rented  being  a  stated  amount  of  money 
(the  standard  of  deferred  payments  or  things  acceptable  to 
the  lender  as  of  equal  value)  and  the  rent  (interest)  being 
a  smaller  amount  of  money.  Interest  is  payable  at  stipu- 
lated periods  until  the  money  loaned  is  returned.  The  ex- 
pression of  the  interest  as  a  percentage  (rate  of  interest)  is 
of  great  practical  convenience,  permitting  as  it  does  payment 
of  parts  of  the  principal  and  for  partial  periods  of  a  year 
without  alteration  of  the  contract.  IVIoreover,  the  expression 
of  interest  as  a  rate  per  cent  of  the  principal  gives  to  the 
interest  problem  an  aspect  very  different  from  any  presented 
by  the  rent  problem.^ 

§  3.  Interest  versus  income,  or  gross  versus  net  income. 
The  sum  paid  as  interest  on  a  loan  and  the  rate  specified 
contain  other  elements  than  a  pure  time-price.  This  is  recog- 
nized constantly  in  practice  and  must  be  observed  in  theory. 

2  When  the  amount  of  the  loan  is  expressed  as  more  than  the  borrower 
receives,  the  deduction  being  either  in  lieu  of,  or  in  addition  to,  an 
expressed  percentage,  the  deduction,  called  discount,  is  interest  taken 
in  advance,  and  therefore  is  not  exactly  equivalent  in  rate  to  the  same 
payment  at  the  end  of  year,  the  time  at  which  the  usual  rate  is 
calculated;  e.g.,  if  a  note  for  $1000  is  discounted  at  6  per  cent  the 
true  principal  is  $910,  and  the  true  interest  $G0  at  the  rate  of  .06383. 
See  ch.  23,  sec.  3,  note. 


Ch.  25]  CAPITALIZATION  AND  INTEREST  303 

Gross  interest  must  be  distinguished  from  net  interest.  The 
lender  does  not,  as  in  most  cases  of  rent,  have  to  make  allow- 
ance for  repairs  and  for  physical  depreciation  of  the  objects 
loaned,  for  the  borrower  is  bound  to  return  the  specific  stand- 
ard of  payment;  but  allowance  must  be  made  first  for  risk, 
or  the  chance  that  the  money  will  not  be  all  returned  or 
paid  promptly.  Risk  and  trouble  are  to  interest  what  de- 
preciation and  repairs  are  to  rent.  (Chapter  15,  section  2.) 
Money  loaned  in  hazardous  ventures  must  yield  a  higher  con- 
tractual rate  of  interest  to  offset  this,  or  the  true  rate  realized 
will,  on  the  average,  be  less  than  the  market  rate.  The  lender 
may  in  the  end  get  either  more  or  less  than  the  usual  interest, 
or  even  get  negative  interest  through  the  loss  of  a  whole  or  a 
part  of  his  capital.  A  lender  strives  in  making  a  number  of 
loans  to  have  the  gains  cancel  the  losses,  so  that  the  capital 
may  be  kept  intact,  besides  yielding  a  net  income  (interest). 
The  lender  must  also  count  the  cost  of  placing,  supervis- 
ing, and  collecting  the  loan.  A  pawnbroker  lends  only  small 
sums  and  spends  much  time  and  effort  to  keep  at  interest  a 
moderate  capital.  The  sum  of  $5000  loaned  for  a  year  in 
sums  averaging  $10  represents  500  transactions,  yet  if  placed 
at  5  per  cent  it  yields  an  income  of  but  $250  a  year.^  While, 
therefore,  the  borrower  of  a  small  sum  may  think  he  is  paying 
an  oppressively  high  rate  of  interest,  the  lender  may  find  that 
the  loan  nets  him  a  very  small  rate  of  income  on  the  invest- 
ment. Risk,  labor,  and  the  various  costs  of  carrying  on  the 
business  of  lending  money,  are  thus  costs  in  exchanging  things 
of  different  time-periods  which  are  analogous  to  transporta- 
tion charges  in  exchanging  things  at  different  places,  nar- 

3  The  Provident  Loan  Association  of  New  York  is  a  corporation  or- 
ganized as  a  philanthropy  to  release  the  poor  borrower  from  the  jaws 
of  the  "loan-shark";  but  it  is  conducted  on  business  principles  to  pay 
expenses.  It  finds  that  the  minimum  cost  of  making  a  loan,  even  the 
smallest,  is  about  49  cents.  Yet  it  makes  a  large  number  of  loans 
of  amounts  less  than  $10,  and  for  not  over  a  month  at  the  rate  of  1 
per  cent  per  month  (or  10  cents  at  the  maximum).  This  loss  must 
be  made  up  by  the  larger  loans. 


304  TIME-VALUE  AND  INTEREST  [Pt.  IV 

rowing  the  margin  of  advantage  and  excluding  many  from 
the  exchange. 

§  4.  Concealed  rate  of  interest.  Interest  is  often  con- 
cealed under  forms  which  make  the  real  rate  greater  than  the 
nominal,  or  apparent,  rate.  It  is  well  known  that  usury  laws 
fixing  the  legal  rate  of  interest  are  often  evaded.  A  simple 
method  is  for  the  lender  to  charge  a  commission  for  making 
the  loan,  or,  if  the  lender  is  a  bank,  to  charge  for  a  pretended 
cost  of  exchange  to  bring  the  money  from  some  other  city. 
Sometimes  the  borrower  is  required  to  keep  larger  deposits 
with  the  bank  than  he  voluntarily  would,  which  he  does  by 
borrowing  and  paying  interest  on  a  larger  sum  that  he  is  per- 
mitted to  use.  Again  the  borrower,  in  periods  of  unusual 
demands  for  money,  may  be  forced  to  make  a  long  loan 
instead  of  a  short  one.  When  a  one  month's  loan  at  10  per 
cent  would  meet  his  need,  he  may  be  forced  to  borrow  for 
twelve  months  at  6  per  cent,  during  ten  months  of  which 
time  4  or  5  per  cent  is  the  prevailing  rate.  In  these  and  other 
ways  the  real  amount  and  the  real  rate  of  interest  are  made 
different  from  those  that  are  expressed. 

§  5.  Commercial  paper.  Interest-bearing  loans  may  be 
roughly  divided  into  short-time  and  long-time  loans,  accord- 
ing as  they  run  for  less  than  a  year  or  for  a  year  or  more. 
In  short-time  loans  the  creditor's  claim  may  rest  either  on  a 
verbal  agreement  or  on  a  written  promissory  note.  Short- 
term  interest  contracts  are  implied  in  a  large  proportion  of 
the  transactions  of  modern  commerce.  A  considerable  num- 
ber of  short-time  loans  are  made  for  direct  enjoyable  use  to 
individuals  whose  money  income  is  delayed  or  inconveniently 
apportioned  in  time.  But  a  far  larger  number  of  such  loans 
are  made  by  banks  on  promissory  notes  given  by  manufac- 
turers and  merchants,  frequently  secured  by  bills  of  lading 
for  goods  that  have  been  shipped  to  customers  or  by  various 
other  evidences  of  existing  credits.  Such  documents  are 
called  commercial  paper,  or  credit  instruments, 

§  6.    Mercantile  cash  discounts.    When  goods  are  sold  on 


Ch.  25]  CAPITALIZATION  AND  INTEREST  305 

time  (as  thirty,  sixty,  or  ninety  days)  the  contract  (except 
in  rare  cases  where  the  terms  are  net  cash)  is  an  implied 
interest  contract,  for  it  specifies  that  the  full  sum  shall  be 
charged  only  when  the  full  time  elapses;  otherwise  the  dis- 
counts for  cash  are  at  various  figures,  such  as  1,  2,  or  6  per 
cent  or  even  higher  for  payment  in  ten  days  (giving  time 
enough  to  examine  the  goods),  and  smaller  rates  for  thirty 
days  or  other  periods.  This  virtually  makes  two  or  more 
prices,  one  to  customers  that  pay  cash,  and  another  to  those 
letting  bills  run.  The  difference  between  cash  in  ten  days 
and  a  discount  of  1  per  cent  in  thirty  days  is  equivalent  to 
a  rate  of  18  per  cent  a  year  on  the  amount  of  the  bill,  and 
is  so  great  that  it  is  impossible  without  taking  advantage  of 
the  discount,  for  a  buyer  to  carry  on  a  business  against  strong 
competition.  Such  purchases  on  credit  frequently  are  made, 
however,  not  only  by  dealers  in  small  towns,  but  sometimes 
by  large  mercantile  establishments  when  short  of  funds. 
''Slow  collections"  go  along  with  increasing  interest  rates 
and  "hard  times." 

If  the  purchaser  does  not  discount  his  bills,  the  seller  has 
the  choice  either  of  waiting  till  the  account  is  due  and  col- 
lecting the  bills  direct  from  the  customers,  or  of  discount- 
ing the  customers'  acceptances  (notes)  for  ready  money  at 
the  bank.  According  to  the  conditions  and  needs  of  the  par- 
ticular business,  either  method  may  be  chosen.  A  series  of 
credits  is  then  created,  each  resting  upon  the  one  below :  man- 
ufacturer A  sells  goods  to  manufacturer  B,  who  sells  the 
finished  product  to  the  jobber  C,  who  sells  it  to  the  retailer 
D,  who  sells  it  to  consumer  E,  and  all  these  credits  for  the 
same  goods  may  be  in  existence  at  the  same  time,  and  every 
one  may  be  represented  by  a  promissory  note  that  may  be 
discounted  at  a  bank.  In  most  industries  there  is  need  for 
larger  capital  at  the  seasons  when  the  product  is  put  upon 
the  market,  and  ordinarily  a  large  part  of  these  debts  are 
converted  into  ready  funds  (discounted)  at  the  banks.  The 
merchant  or  manufacturer  plans  his  business  in  the  expecta- 


306  TIME-VALUE  AND  INTEREST  [Pt.  IV 

tion  of  an  average  rate  of  interest  at  such  times,  and  if  it 
chances  that  the  rate  is  abnormally  high,  he  has  no  choice  but 
to  go  on  borrowing  and  pajdng  the  high  rate  of  interest  out 
of  the  expected  profits  of  his  business.  This  risk  of  a  change 
in  the  interest  rate  is  one  of  the  many  chances  he  has  to 
run. 

§  7.  Long-time  loans.  A  large  part  of  the  debts  in  mod- 
ern times  are  outstanding  for  a  term  of  years  and  represent 
the  lender's  purchase  of  a  claim  on  income  from  public  or 
private  sources.  The  most  familiar  form  of  long-time  loan 
is  that  made  on  the  security  of  real  estate,  which  is  mort- 
gaged to  the  lender  for  the  term  of  the  debt.  Usually  the 
debtor  is  obliged  to  pay  the  interest  either  annually  or  semi- 
annually, and  often,  but  not  always,  is  permitted  to  reduce 
the  principal  by  partial  payments.  These  real-estate  mort- 
gages rest  on  the  security  of  the  particular  mortgaged  wealth, 
and,  unlike  most  short-time  loans  in  bank,  are  not  obligations 
resting  primarily  on  the  general  credit  of  the  borrower. 
Corporation  bonds,  issued  by  railroads  and  other  public  utility 
corporations,  which  have  increased  so  greatly  in  recent  years, 
yield  an  income  fixed  in  advance,  and  are  secured  usually 
by  mortgage  on  the  entire  property  of  the  corporation  issuing 
them.  (The  income  on  some  special  kinds  of  "preferred 
stocks"  is  so  certain  as  to  make  them  for  investors  almost 
the  same  as  bonds,  but  they  are  legally  not  loans,  payable 
at  a  certain  time,  but  are  evidences  of  ownership.)  Another 
large  class  of  long-time  loans  are  those  made  by  national, 
state,  and  local  governments.  Tens  of  billions  of  dollars  of 
public  debts  are  now  outstanding,  held  by  private  investors  in 
every  walk  of  life. 

The  contract  in  the  case  of  each  kind  of  these  loans  pro- 
vides for  a  fixed  term  after  which  the  borrower  must  repay 
or  renew,  and  for  a  fixed  rate  on  the  nominal  or  par  value  of 
the  loan.  Nearly  all  the  securities  (bonds,  certificates,  evi- 
dences of  indebtedness)  are  saleable  at  a  market  rate.  The 
incomes  are  fixed,  the  selling  price  (or  capital  value)  fluctuat- 


Ch.25]  capitalization  AND  INTEREST  307 

ing  above  or  below  the  nominal  sum  except  just  at  the  moment 
when  the  debt  falls  due. 

§  8.  Special  markets  for  money  loans.  The  choice  of 
timeliness  is  possible  in  a  market  along  any  one  of  many 
series  of  incomes,  but  in  commercial  circles  trade  in  timeli- 
ness most  commonly  takes  the  form  of  money-loans.  Let  us 
see  how  this  would  appear.  Let  lender  A  offer  some  dollars 
at  10  per  cent  interest  (or  more) ;  let  borrower  B  be  ready 
to  borrow  some  dollars  at  16  per  cent  (or  any  less).  Then 
there  is  a  motive  for  trade  (omitting  fractions)  for  a  loan 
at  any  rate  between  15  and  11,  let  us  say  13  per  cent.  But 
this  motive  exists  only  with  respect  to  eertaiu  marginal  units 
of  money,  not  without  limits.  A  could  not  give  up  all  his 
control  over  income  during  the  year  for  13  per  cent  for  that 
would  mean  greater  present  deprivation  than  he  chooses  to 
make;  B  would  not  borrow  much  beyond  a  certain  amount 
even  at  less  than  13  per  cent,  for  he  would  have  to  pay  in- 
terest either  for  less  urgent  personal  desires  (consumption 
loans)  or  to  get  control  of  incomes  which  to  him  will  yield 
a  smaller  surplus.* 

If  there  are  numerous  competing  would-be  lenders  and  bor- 
rowers there  is  a  true  lending  market.  The  various  prefer- 
ence rates  (each  regarding  successive  dollars,  viewed  with 
relation  to  the  marginal  valuation)  unite  into  hypothetical 
bidders'  curves  (as  in  the  market  for  commodities,  see  Chap- 
ter 7)  and  a  price  results  that  establishes  equilibrium  between 
demand  and  offer.^     So  in  a  market  all  the  individual  bids 

*If  B  (having  good  security  to  offor)  should  bid  a  very  high  rate 
of  interest  (say  20  per  cent)  either  through  bad  judgment  or  because 
of  a  chance  to  buy  under-capitalized  goods  (or  incomes)  it  might 
induce  A  to  sell  his  goods  which  involve  a  premium  of,  let  us  say,  only 
10  per  cent,  to  lend  the  proceeds  to  B;  A  meantime  could  escape  any 
deprivation  by  renting  the  goods  he  had  sold,  for  a  little  more  than 
half  of  the  interest  he  is  receiving.  A  is  then  not  using  fewer  present 
goods  but  is  temporarily  taking  advantage  of  a  chance  to  substitute  a 
more  advantageous  mode  of  purchasing  both  present  and  future  incomes. 

5  This  may  be  traced  on  figure  11,  showing  how  various  bids  meet  in 


308  TIME-VALUE  AND  INTEREST  [Pt.  IV 

that  are  satisfied  and  enter  into  the  making  of  the  market- 
price  are  modified  by  trade;  the  urgent  bidder  (or  bidders) 
on  either  side  is  included  on  the  marginal  principle,  the 
units  most  easily  spared  being  loaned,  the  units  most  urgently 
desired  being  borrowed.  As  in  the  market  for  objective  com- 
modities, so  in  the  market  for  loans,  the  valuations  of  the 
various  individuals  within  a  certain  range  are  thus  brought 
into  conformity  with  the  market-price.  The  earlier  isolated 
valuations  cease  to  be  actual;  they  are,  as  we  look  back  at 
them,  merely  of  historical  interest,  and  as  we  look  forward, 
are  only  hypothetical,  being  the  rates  at  which  preference 
would  appear  under  other  conditions  than  the  present.  (See 
Chapter  7,  section  7.) 

Under  these  conditions  the  price  of  loans  (expressed  as  a 
rate  of  interest)  has  to  the  superficial  view  an  appearance  of 
independence,  as  if  the  market  for  loans  were  a  thing  apart 
from  the  existing  premium  involved  in  capitalization.  But 
this  loan  market  could  not  exist  apart  from  an  existing  status 
of  prices.  Money  borrowed  to  keep  would  indeed  be  barren 
of  any  income ;  it  would  even  cease  to  be  money .^  The  repre- 
sentative character  of  money  makes  a  loan  mean  to  the  bor- 
rower the  loan  of  whatever  use-yielding,  or  whatever  rent- 
bearing,  agent  can  be  bought  with  the  amount  of  money  bor- 
rowed; and  makes  it  mean  to  the  lender  parting  with  the 
purchasing  power  to  buy  goods  at  their  present  prices.  The 
loan  market  is  meaningless  and  motiveless,  if  it  be  thought 
of  as  cut  off  from  the  existing  system  of  prices  (capitali- 
zation) . 

§  9.    Capitalization,  the  clue  to  the  general  interest  rate. 

a  common  price.  The  excluded  lenders  on  the  line  to  the  right  of  the 
price  point  are  those  who  hold  their  present  dollars  (or  a  part  of  them) 
rather  than  lend  further  at  the  market-rate  of  interest;  the  excluded 
buyers  are  those  to  whom  further  loans  at  the  market  will  cost  more 
than  the  expected  increment  in  incomes. 

8  Of  course  cases  occur  where  after  the  loan  is  made,  the  money  is 
kept  for  a  while  awaiting  a  better  time  to  buy  the  incomes  which  are 
to  yield  the  increment  of  price. 


Ch.  25]  CAPITALIZATION  AND  INTEREST  309 

In  agreeing  to  pay  interest  at  a  certain  rate,  the  borrower  is 
obviously  selling  to  the  lender  the  right  to  collect  a  series  of 
future  money  incomes  including  the  return  of  the  principal, 
and  is  in  return  buying  a  present  sum  of  money.  The  princi- 
pal is  the  result  of  capitalizing  the  incomes,  so  discounted 
that  they  will  emerge  at  the  rate  of  interest  specified  on  the 
investment  of  capital.  A  thousand  dollars  at  5  per  cent  will 
yield  an  income  of  $50  a  year  until  the  principal  is  repaid. 
The  loan  is  in  perpetuity  unless  a  date  of  payment  is  named. 
The  form  of  the  loan  at  interest  plainly  is  that  of  the  ex- 
change of  a  larger  (future)  sum  of  money  for  a  smaller 
(present)  one.  From  ancient  times  this  has  seemed  on  the 
face  of  things  a  moral  wrong  to  the  borrower  and  an  economic 
mystery,  therefore  an  economic  absurdity.  "Money  is  bar- 
ren," said  Aristotle,  and  his  thought  is  often  echoed  to-day 
in  communistic  arguments  against  the  loan  of  money  at 
interest.  * '  The  borrower  pays  interest  and  agrees  to  this  un- 
equal bargain  because  he  is  made  to  pay,"  is  declared  on  the 
one  side;  "he  pays  because  he  can  afford  to  pay,"  is  answered 
from  the  other.  Both  statements  may  be  right  yet  their  very 
form  indicates  that  the  problem  is  looked  upon  as  one  of 
morality  rather  than  of  economics.  The  borrower  doubtless 
would  not  make  such  an  agreement  unless  he  chose  to  do  so ; 
his  choice,  as  every  choice,  may  be  thought  of  as  due  to  eco- 
nomic pressure  or  to  economic  advantage,  as  a  choice  of  evils 
or  a  choice  of  benefits.  Why  must  he  (can  he  be  made  to) 
pay  interest  if  he  is  to  get  the  loan?  How  can  he  afford  to 
pay  interest? 

After  the  foregoing  study  of  time-preference  and  capital- 
ization we  have  not  far  to  go  to  find  the  explanation  of  the 
contractual  rate  of  interest  at  which  incomes  are  yielded  on 
money  loans.  No  borrower  would  or  could,  for  long,  pay  in- 
terest on  money  and  let  it  lie  in  a  chest.  What  does  he  do 
with  it?  He  buys  things.  Everything  he  can  buy  has  a 
price,  is  capitalized,  and  the  explanation  of  the  interest  rate 
lies  in  the  relation  between  the  price  of  goods  that  present 


I 


310  TIME- VALUE  AND  INTEREST  [Pt.  IV 

money  will  buy,  and  the  price  of  the  series  of  incomes  which 
those  goods  will  afford  up  to  the  time  of  the  repayment  of  the 
loan. 

§  10.  Time-series  of  incomes,  monetary  and  non-mone- 
tary. Before  ever  a  money-loan  was  made,  before  even  money 
had  come  into  existence  in  the  world,  time-preference  existed. 
It  lies  in  the  very  nature  of  choice  by  animals  and  by  sav- 
ages. (See  Chapter  20,  section  2.)  In  many  ways  it  is  inter- 
woven into  the  valuations  of  every  self-sufficing  economy  in  the 
days  of  barter.  It  becomes  generalized  as  a  prevailing  rate  in 
each  individual's  economy  and  as  a  price  for  timeliness  in  all 
exchanges  of  goods  and  uses  of  different  time-periods.  The  rate 
becomes  equalized  as  between  different  series  of  uses,  as  the 
rate  of  time-preference  and  of  time-price  can  not  consistently 
be  greatly  unequal  within  any  circle  where  time-choice  is 
possible.''  The  use  of  money  in  trade  gave  much  greater  ex- 
actness to  this  time-price  as  embodied  in  goods  and  to  their 
prices  in  relation  to  the  times  of  their  use.  To-day  in  the  in- 
numerable valuations  of  many  business  enterprises  where 
there  is  no  monetary  borrowing  and  lending  time-preference 
expresses  itself  in  the  capitalization  (price)  of  the  durative 
agents  of  the  environment.  Every  loan  of  money  (or  of 
goods  in  terms  of  money)  at  interest  therefore  occurs  where 
the  price  of  goods  already  embodies  this  premium  on  the  pres- 

'TMs  approximation  to  a  common  rate  of  yield  on  various  invest- 
ments may  be  illustrated  by  some  such  table  as  the  following,  showing 
the  choices  that  present  themselves  to  an  investor. 

Yield  in  Money  Terms. 
Form  of  Present         Ist       2d       3d       4th    In  per-  Rate  of 

Investment  price  yr.       yr.      yr.       yr.    petuity  income 

House  and  lot $1,800  100  100       100       100       100  5.55% 

Farm   and   buildings.   5,000  250  250       250       250       250  5.00% 

Horse    200  12  12         12       212       ...  6.00% 

Cow    100  15  15         10         81        ...  6.00% 

Agricultural  products    1,000  1,070       7.00% 

Dollars    1,000  50  50        50         50         50  5.00% 

$100  capital  invested  will  buy  net  incomes  of  as  many  dollars  as  the 
rate  per  cent. 


Ch.  25]  CAPITALIZATION  AND  INTEREST  .      311 

ent  possession.  Indeed  it  is  simply  this  which  would  give  a 
borrower  a  motive  for  a  new  loan.  Here  are  many  different 
agents  and  many  series  of  yields,  the  price  of  all  of  them  ex- 
pressed in  terms  of  the  money  unit  (let  us  say  the  dollar). 
The  money  prices  involve  the  rate  of  premium  on  present 
valuations  (and  correspondingly  a  discount  on  future 
prices) . 

§  11.  Present  dollars  and  what  they  can  buy.  A  pres- 
ent dollar  is  purchasing  power  that  gives  possession  of  future 
incomes  at  discounted  prices.  The  market  would  present  it- 
self something  like  the  (greatly  simplified)  illustrative  table. 
"Whoever  has  a  disposable  dollar  which  he  does  not  need  or 
choose  to  use  for  present  desires,  may  either  buy  something 
and  hold  it  for  the  expected  increase,  or  he  may  by  the  method 
of  money  loans  lend  it  to  another  person  to  do  the  same.  It 
matters  not  how  the  dollar  happened  to  be  disposable,  whether 
it  was  stolen,  or  was  received  in  payment  for  some  other 
property,  or  is  new  savings  from  interest  on  other  loans,  or 
from  wages,  etc. ;  in  any  case  the  dollar  gets  its  power  of  earn- 
ing interest  from  this  prevailing  discount  on  the  future,  in- 
volved in  prices.  Because  of  this  fact  the  owner  of  a  dollar 
possesses  an  economic  power  which  he  can  assign  by  contract 
to  a  borrower.  Interest  then  might  be  described  as  the  price 
paid  by  a  borrower  for  the  right  to  buy  goods  at  discounted 
prices.  Money  is  a  generalized  present  good,  and  when 
loaned  at  interest  is  exchanged  for  the  promise  of  future 
goods  at  a  ratio  reflecting  prevailing  capitalization. 

§  12.  Blending  of  the  investment  premiums  into  a  com- 
mon rate.  Now  given  the  existence  of  these  parallel  series 
of  time-prices  in  different  lines  of  agents  and  products,  it 
follows  that  they  must,  so  far  as  exchange  takes  place  among 
men,  tend  to  embody  a  common  rate.  Aside  from  differences 
in  the  difficulty  of  keeping,  ease  of  management,  etc.,  all  these 
series  must,  by  the  law  of  substitution,  be  leveled  toward  a 
common  rate  of  income.  This  would  include  money  also,  for 
in  its  function  as  a  medium  of  exchange,  money  will  be  spent 


812  TIME- VALUE  AND  INTEREST  [Px.  IV 

always  for  the  thing  which  at  the  moment  has  the  highest 
value.  In  the  hands  of  an  investor  buying  money  incomes, 
the  money  will  be  spent  in  the  way  to  buy  (other  things 
equal,  trouble,  risk,  etc.)  the  largest  net  income.  Therefore, 
the  bidding  of  investors  for  whichever  income  is  offered  at  the 
lowest  capitalization  tends  to  level  (up  or  down)  the  invest- 
ment-power of  a  dollar  in  all  the  options  of  present  goods 
offered.  The  different  choices  blend,  in  a  variety  of  ways, 
into  the  common  rate  of  which  the  interest  rate  is  the  super- 
ficial expression.  As  happens  in  the  exchange  of  commodi- 
ties, the  individual  valuations  vary  from  the  market-price — 
as  a  result  of  different  circumstances  of  age,  health,  ability 
for  business  and  liking  for  it,  particular  tastes  inclining  to 
this  or  that  business,  etc.  This  variation  of  values  from  mar- 
ket-price leads  men  to  become  borrowers  or  lenders,  in  this 
or  that  line  of  investment.  The  individual  takes  the  market- 
rate  as  a  fact,  and  adjusts  his  own  conduct  to  it.®  Money 
being  at  the  same  time  the  medium  of  exchange,  the  common 
denominator  of  prices  and  the  standard  of  deferred  payments, 
is  the  unit  in  which  all  these  valuations  are  expressed.  In 
one  form  preeminently,  the  interest  contract,  the  rate  of  time- 
preference  comes  to  a  definite  arithmetic  expression.  The 
rate  of  interest  sometimes  appears  to  be  the  determining  fac- 
tor, whereas  it  is  but  the  reflection  of  the  choice  of  timeliness 
in  the  whole  economic  situation. 

§  13.  Indicative  nature  of  the  interest  rate.  We  have 
now  before  us  the  broad  outlines  of  the  theories  of  time-value, 
of  capitalization,  and  of  the  rate  of  interest  on  money-loans. 
We  understand  how  these  are  but  aspects  of  the  same  prob- 
lem, and  how  the  market-rate  of  interest  (after  due  allowance 
for  risk  and  other  deductions)  registers  a  prevailing  price 
for  timeliness,  which  pervades  the  whole  economic  structure 
of  society.  Money  is  the  unit  in  which  capital  and  interest 
are  expressed,  but  money  is  no  more  their  cause  than  the  hands 
of  the  clock  are  the  cause  of  the  time  of  day.    And  the  rate 

8  This  aspect  of  the  case  is  given  further  attention  in  ch.  27,  sec.  7,  8. 


Ch.25]  capitalization  AND  INTEREST  313 

of  interest  is  no  more  the  cause  of  time-preference  than  the 
shadow  on  the  sun  dial  is  the  cause  of  the  rotation  of  the 
earth  on  its  axis.  The  interest-rate  is  hut  an  index  of  the 
ratio  inherent  in  the  equilibrium  of  psychological  forces,  de- 
sires for  present  and  future  incomes ;  that  is,  time-preference. 
A  change  in  the  mental  habits,  in  regard  to  this  choice,  on 
the  part  of  any  considerable  number  of  men,  must  change 
the  general  distribution  in  time  of  the  entire  series  of  in- 
comes under  the  control  of  men,  collectively.  Future  incomes 
are  maintained  only  through  the  constant  exercise  of  the 
faculty  of  abstinence.  This  conserving  and  dynamic  influ- 
ence of  abstinence  we  shall  study  further  in  Chapter  38. 


PART  V 
ENTERPRISE  AND  PROFIT 


CHAPTER  26 
ENTERPRISE 

§  1.  Factors  of  production  must  be  combined.  §  2.  Non-contractual 
and  contractual  incomes.  §  3.  From  small  shop  to  large  factory.  §  4. 
The  residual  share.  §  5.  The  typical  owner-manager.  §  6.  Empirical 
methods  of  estimating  and  apportioning  the  residual  share.  §  7.  Utmost 
possible  degree  of  separation  of  investment  and  management.  §  8.  Cor- 
porations and  their  control.  §  9.  Single  investment  function  of  minor- 
ity stockholders. 

§  1.  Factors  of  production  must  be  combined.  E very- 
separate  thing  that  enters  into  the  making  of  goods  is  called 
an  economic  agent;  as  in  agriculture,  the  seeds,  plows,  fields, 
fences,  barns,  cattle,  and  labor ;  in  manufacture,  the  buildings, 
machines,  material,  labor,  etc.  But  these  numerous  agents 
fall  into  two  great  groups  called  factors  of  production,  vari- 
ously named  as  man  and  nature,  labor  and  material  agents, 
or  humanity  and  wealth.  We  have  studied  separately  the 
processes  by  which  value  is  attributed  to  these  agents,  yet  we 
have  borne  in  mind  always  that  they  are  complementary 
agents  and  complementary  factors.  (See  Chapter  18,  section 
10,  and  Chapter  19,  section  14.)  Labor  in  a  void  and  wealth 
without  labor  would  be  equally  useless.  The  process  of  valu- 
ing uses  of  goods  and  services  of  labor  goes  on  while  all  of  these 
goods  help  make  up  the  situation  in  which  the  desires  exist. 

The  stock  of  economic  goods  of  whatever  sort  is  limited, 
while  the  upspringing  desires  are  practically  unlimited.  To 
increase  goods,  labor  is  applied  to  material  objects.  Man's 
part  in  production  is  almost  passive  when  goods  come  into 
existence  without  his  effort.  One  can  imagine  the  indolent 
savage  of  the  tropics,  lying  under  the  banana-tree,  letting  the 

317 


318  ENTERPRISE  AND  PROFIT  [Pt.V 

fruit  drop  into  his  mouth.  But  at  least  he  must  be  there 
ready  for  it  to  drop.  One  can  conceive  of  a  tribe  living 
on  natural  fruits,  where  every  day  the  people  awoke  to  find 
the  various  kinds  of  food  provided,  like  manna,  at  each  per- 
son's hand.  Tho  the  existing  amounts  were  secured  without 
effort,  nevertheless  any  differences  in  flavor  would  cause  dif- 
ferences in  value  to  arise  and  trade  to  take  place.  Now  there 
is  something  analogous  to  that  in  daily  experience.  There  are 
some  goods  which  effort  can  do  little  to  increase.  Usually, 
however,  there  is  a  possibility  of  change  and  adaptation  to 
make  them  better  suited  to  needs,  and  there  is  required  the  use 
of  intelligence  to  choose  among  the  goods  and  to  employ  them 
in  the  best  way.  Further,  man  can  intervene  and  direct  the 
course  of  industry;  he  does  not  merely  gather  what  is  pro- 
vided. It  is  this  active  intervention  and  effort  that  is  here 
to  be  considered. 

§  2.  Non-contractual  and  contractual  incomes.  It  is 
from  this  process  of  combining  the  factors  that  the  various 
yields  and  incomes  emerge  which  have  been  heretofore  treated. 
The  various  laborers  and  kinds  of  wealth  when  brought  to- 
gether produce  goods  and  the  values  attributable  respectively 
to  the  various  agents  are  their  yields.  The  various  persons 
to  whom  the  yields  accrue  are  said  to  secure  incomes  out  of 
these  yields.    The  incomes  are  of  two  kinds. 

(1)  A  non-contractual  (impersonal  or  "economic")  in- 
come is  obtained  from  the  yield  of  the  agents,  not  from  an^ 
other  person  to  whom  the  agent  has  been  rented  or  loaned. 
The  laborer  gets  an  economic  income  from  his  labor  when 
he  gathers  wood  for  his  own  fire,  or  builds  a  house  for 
himself.  Wealth  yields  an  economic  income  to  its  owner,  as 
the  products  of  the  field,  the  use  of  (or  the  objects  made 
with)  the  tools  of  the  craftsman.  Direct  labor-incomes  and 
the  usances  of  wealth  appear  first  as  economic  incomes.  This 
is  the  only  kind  of  income  possible  on  Crusoe's  Island  and 
in  any  non-exchanging  economy. 

(2)  A  derivative  kind  of  income  appears  as  soon  as  men 


Cii.  26]  ENTERPRISE  31d 

begin  to  hire  labor  and  borrow  the  uses  of  wealth.  A  con- 
tractual income  is  one  received  from  a  person  for  the  right 
to  receive  an  economic  income.  For  example,  the  carpenter 
building  a  house  for  another  man  does  not  possess  the  eco- 
nomic yield  of  his  own  labor  as  it  is  performed.  That  be- 
longs to  the  owner  of  the  materials  from  whom  the  carpenter 
gets  a  contractual  income.  All  wages  and  rents  (as  we  use 
the  terms)  are  contractual  incomes. 

To  cases  that  appear  puzzling  to  classify  this  test  may  be 
easily  applied.  In  whom  is  the  legal  title  of  a  use  or  of  a 
service  vested  at  the  instant  it  is  yielded?  To  him  belongs, 
in  first  instance,  the  economic  income,  subject  to  the  claims 
of  others  w^ho  must  look  to  him  for  their  pay.  Thus  the 
owner  of  the  factory  owns  the  product  altho  he  may  have  to 
pay  rent  to  a  landlord  and  wages  to  his  workmen. 

People  thus  are  of  two  classes  as  regards  the  mode  of  re- 
ceiving income:  self-employed,,  earning  economic  labor-in- 
comes; and  employed,  receiving  (contractual)  wages  from 
active  capitalists.  Capitalists  are  of  two  classes:  the  active 
capitalists,  risk-takers,  getting  non-contractual  capital-in- 
comes, whom  we  shall  call  enterprisers;  and  the  passive  cap- 
italists, risk-limiters,  getting  contractual  incomes  from  active 
capitalists.  The  self-employed  laborer  is  in  every  case  to  some 
slight  degree  an  active  capitalist.  The  neediest  fisherman 
must  have  title  to  the  string  of  fish  before  he  sells  it  to  change 
it  for  a  money  income.  Every  economic  product  that  endures 
an  instant,  rests  in  the  hands  of  an  active  capitalist. 

§  3.  From  small  shop  to  large  factory.  Some  examples 
applying  these  terms  may  make  the  matter  clearer.  A  fur- 
niture-maker (a  joiner)  in  a  village  owns  his  little  shop,  the 
land  on  which  it  stands,  his  tools,  some  lumber,  and  a  few 
pieces  of  finished  goods.  From  day  to  day  he  sells  the  ready 
furniture,  or  takes  orders  for  which  he  receives  money  or 
lumber  or  articles  of  food  and  other  supplies  for  his  own 
household  use.  If  with  his  money  and  goods  he  can  pay 
for  the  materials  he  needs  and  have  left  a  living  for  himself, 


820  ENTERPRISE  AND  PROFIT  [Pt.V 

his  income  of  goods  is  the  combined  result  of  his  labor  and 
of  his  capital  (that  is,  of  his  right  to  the  uses  of  his  shop, 
tools,  and  stock  of  goods).  He  is  enterpriser,  manager,  and 
laborer,  all  in  one,  and  gets  one  non-contractual  income,  which 
as  to  its  value  is  imputable  to  several  different  economic 
sources.  Now  this  man  takes  an  apprentice  or  two,  hires  two 
or  three  workmen  to  keep  up  with  the  increasing  orders, 
hires  another  shop  next  door  for  which  he  pays  rent,  and 
borrows  some  money  to  buy  new  tools  and  more  materials  so 
that  he  can  keep  a  larger  stock  of  ready  goods.  Less  of  his 
time  is  given  to  handwork  and  more  to  meeting  customers, 
making  new  designs  and  patterns,  hiring  and  directing  his 
assistants,  buying  materials,  and  keeping  his  accounts.  As 
the  business  grows  he  finds  he  must  employ  salesmen  to  meet 
customers,  a  foreman  to  direct  the  workmen  in  the  shop,  a 
bookkeeper  to  relieve  him  of  the  mere  clerical  labors,  perhaps 
finally  a  special  artistic  designer  and  pattern  maker.  At 
length  there  remain  for  him  to  do  only  the  larger  planning 
of  the  business  as  a  whole,  the  hiring  of  his  subordinates,  and 
the  general  oversight  and  criticism  of  all  departments  so  that 
everything  may  be  kept  smoothly  working. 

§  4.  The  residual  share.  From  the  moment  the  first  ap- 
prentice was  hired  or  the  first  dollar  was  borrowed,  the  busi- 
ness became  the  source  of  a  contractual  income  to  some  one, 
and,  at  last,  of  many  contractual  incomes,  besides  the  one 
non-contractual  income  of  the  active  enterpriser.  These  con- 
tractual incomes  have  the  familiar  price-names  of  wages  (and 
in  special  cases,  salaries),  rents,  and  interest.  The  non-con- 
tractual income  let  us  call  profits,  postponing  for  a  time  the 
more  exact  definition  of  the  term.  Before  the  owner  can 
count  his  profits  at  the  end  of  the  year  he  must  pay  the  agreed 
price  of  services  and  usances,  wages  to  his  apprentices,  work- 
men, salesmen,  bookkeepers,  foremen,  designers,  etc.,  rent  to 
the  owner  of  the  building  or  of  hired  machinery,  interest  to 
the  lender  of  money  or  to  the  seller  of  lumber,  supplies,  etc. 
The  contractual  incomes  of  these  other  persons  are  prices,  ex- 


Ch.  26]  ENTERPRISE  321 

pressed  in  money-terms  and  paid  by  the  enterpriser ;  his  non- 
contractual income  is  what  money  and  other  goods  he  has  taken 
out  for  his  own  use  in  that  period,  plus  the  net  capital  re- 
maining that  has  accrued  within  the  year.  In  the  rare 
case  where  the  business  is  bought  at  the  beginning  of  the 
year,  and  is  sold  at  the  end,  at  a  definite  price,  the  difference 
(plus  the  amount  meantime  taken  out)  would  exactly  ex- 
press the  money  income.  But  in  a  growing  business  the  ac- 
tive capitalist's  income  can  only  be  estimated,  by  taking  care- 
ful invoices  of  all  property  at  the  beginning  and  at  the  end 
of  the  year,  making  allowances  for  needed  repairs  and  for 
depreciation,  counting  outstanding  debts  and  credits,  amounts 
taken  out  for  the  owner's  use,  etc.,  and  finding  the  resulting 
net  excess  of  capital-value  at  the  end  of  the  year.  This  bal- 
ance, if  there  be  any,  is  the  composite  income  of  the  owner, 
who  is  at  the  same  time  manager,  and  it  contains  whatever  is 
to  be  attributed  to  his  own  services  and  to  his  invested  capital 
of  whatever  sort.  Viewing  all  the  incomes  in  a  legal  light, 
this  is  the  one  residual  income — it  is  what  remains  to  the 
o\N'ner  after  paying  all  claims  against  the  business.  As  a  mat- 
ter of  bookkeeping  also  this  is  the  one  residual  income,  being 
the  arithmetic  remainder  after  subtracting  from  the  total 
value  of  the  products  added  in  the  course  of  the  year  to  the 
capital,  the  total  outlay  (attributable  to  that  year)  which  in- 
cludes all  of  the  contractual  incomes  due.^ 

1  It  must  not  be  thought,  however,  that  viewed  as  a  value-problem,  as 
a  question  of  logic,  this  share  is  a  mere  residual.  That  is,  it  must 
not  be  thought  that  all  the  other  contractual  shares  (wages,  rents,  etc.) 
are  determined  prior  to,  and  independent  of,  this  share  of  the  active 
capitalist,  who  takes  what  is  left  without  having  had  any  choice  in 
the  matter.  That  would  be  so  if  he  could  do  nothing  whatever  about 
readjusting  and  rearranging  his  investments.  The  various  contractual 
incomes  are  determined  in  an  economic  equilibrium  of  which  the  pros- 
pect of  active  capitalists  getting  a  more  or  less  definitely  estimated 
minimum  return  is  an  essential  part.  The  expectation  of  income  has 
guided  the  enterpriser's  choice  of  a  business  just  as  it  guides  the 
laborers    (see  ch.   18,  sec.  3).     For  this  particular  year  and  business 


I 


322  ENTERPRISE  AND  PROFIT  [Pt.V 

§  5.  The  typical  owner-manager.  This  union  of  the  func- 
tion of  business  manager  with  that  of  active  investor  was  at 
one  time  well-nigh  universal,  and  it  is  still  common  in  smaller 
enterprises.  As  applied  to  a  small  business  this  organization 
has  the  advantage  of  uniting  in  one  person  the  one  who  is 
most  concerned  as  to  the  financial  outcome  and  the  one  whose 
judgment,  energy,  and  care  most  largely  determines  the  re- 
sult. It  unites  responsibility  and  power.  This  plan  still  ob- 
tains generally  in  agriculture.  In  the  United  States  in  1910 
there  were  6,300,000  farms  of  which  62  per  cent  were  culti- 
vated by  the  owners,  1  per  cent  by  managers,  and  37  per  cent 
by  tenants  (which  implies  nearly  always  a  large  measure  of 
oversight  by  the  owner).  A  large  proportion  of  the  smaller 
factories  are  run  in  this  way  by  an  owner  who  started  the  busi- 
ness, or  who  has  succeeded  his  father,  or  who,  beginning  as  an 
apprentice,  has  advanced  step  by  step  in  an  older  factory, 
getting  first  a  share,  and  at  last  becoming  head  of  the  estab- 
lishment. This  plan  prevails  also  in  the  great  majority  of 
retail  stores  and  in  many  wholesale  stores.  A  boy,  going  into 
a  store,  works  up  to  a  clerkship,  and  winning  promotion  step 
by  step,  gets  a  larger  and  larger  share  of  the  ownership  and 
becomes  the  chief  executive  in  the  business. 

§  6.  Empirical  methods  of  estimating  and  apportioning 
the  residual  share.  While  management  and  ownership  are 
thus  united  in  one  person  or  in  one  family,  the  attributing 
of  the  shares  due  to  the  personal  labors  of  the  management 
and  to  the  investment  is  very  imperfectly  done.  Indeed  in  a 
small  business  no  effort  is  made  to  do  so  except  in  a  vague 
and  incidental  way.  (See  Chapter  18,  section  10.)  The  sim- 
ple furniture-maker  chose  his  trade  primarily  because  of  the 
labor-income  it  would  yield — tho  the  need  of  tools  and  some 
investment  in  materials  enters  in  some  measure  into  the  de- 
cision, as  a  burden  (cost)  incident  to  the  trade,  keeping  some 

this  kind  of  share  is  an  arithmetic  residual,  but  year  in  and  year  out 
it  is  as  much  subject  to  adjustment  by  investors'  valuations  as  is  any 
other  share.     (Of  this,  more  below,  under  cost  of  production,  p.  34G  ff. ) 


Ch.  26]  ENTERPRISE  323 

men  out,  and  causing  others  to  drop  out  when  they  can  not 
keep  up  their  equipment.  But  when  the  capital  investment 
in  shop,  tools,  materials,  and  stock  is  considerable,  it  comes 
to  be  estimated  by  comparison  with  alternative  contractual 
incomes.  A  shopkeeper  who  clears  $1000  in  the  year,  seeing 
that  he  could  sell  out  for  $4000  and  lend  the  sum  for  5  per 
cent,  counts  ''a  fair  return"  on  his  investment  as  approxi- 
mately $200  and  his  services  at  $800  a  year;  or  having 
reason  to  think  that  he  could  not  get  a  position  working  for 
an  employer  that  would  give  him  more  than  $700,  counts  his 
capital-income  as  $300,  or  7i/^  per  cent ;  or  having  an  offer  of 
a  good  permanent  position  at  $900,  counts  that  he  is  making 
but  $100  on  his  capital,  which  is  but  2i/^  per  cent  of  what 
some  one  will  pay  him  for  it.  Even  in  this  case,  either  the 
greater  independence  of  being  his  own  master  or  the  prospect 
of  better  business  may  deter  him  from  making  the  change. 
It  is  well  known  that  many  small  owner-managers  both  in 
handicrafts  and  in  agriculture  make  no  more,  or  even  less, 
than  "hired  man's  wages." 

§  7,  Utmost  possible  degree  of  separation  of  investment 
and  management.  In  the  case  of  a  growing  business  (such 
as  that  of  the  furniture-maker,  section  3),  as  the  owner-man- 
ager transfers  one  duty  after  another  to  an  employee,  the 
wage  (or  salary)  paid  becomes  a  part  of  the  definite  costs  of 
the  business.  If  his  own  labor  is  freed  for  more  important 
things  his  final  residuum  will  be  greater.  He  can,  however, 
transfer  one  duty  after  another  to  others  without  taking  upon 
himself  other  tasks.  Taking  now  the  case  of  one  who  is  al- 
ready the  owner  of  an  establishment,  consider  what  is  the 
farthest  point  to  which  it  would  be  possible  to  carry  this  dif- 
ferentiation of  ownership  (investment)  and  management. 
It  can  go  to  the  point  where  the  only  task  of  management 
remaining  to  the  owner  is  the  appointment  (and  removal)  of 
the  general  manager,  all  other  matters  being  left  to  the  ap- 
pointee. 

§  8.    Corporations  and  their  control.    Rarely  when  there 


824  ENTERPRISE  AND  PROFIT  [Pt.  V 

is  a  single  owner  does  he  so  completely  divest  himself  of  the 
managing  function.  But  ownership  and  management  are 
more  nearly  and  more  often  separated  when  the  organization 
is  that  of  a  stock  company,  or  corporation,  the  ownership  of 
which  is  divided  among  the  holders  of  shares  of  stock,  or  cer- 
tificates of  membership.  Many  corporations  have  been  organ- 
ized by  the  successful  single  owner  (or  by  partners,  or  by  a 
family)  as  a  method  of  enlarging  the  business,  or  of  selling 

I  ENTERPRISER  I 
' I 

MANAGER 


I       FQREIMAN 

■       ■        .        .  I    .    II    .   1    .         ■        ■        ■        ■ 

j  w I  w  i  w  I  w  I     I  w|  w  |w  |w|     i  w  I  w  I  w  I  w| 

Fig.  38.  Military,  or  Line,  Organization.* 
*  The  separation  of  enterprise  and  management  may  be  seen  in  this 
simple  type  of  organization.  The  enterpriser  (a  person  or  group  of  per- 
sons) selects  the  manager,  who  in  turn  appoints  his  subordinates.  Each 
person  in  the  organization  receives  directions  from  one  immediate 
superior. 

all  or  part  of  it,  when  the  owner  wished  to  retire,  or  to  reduce 
his  responsibilities  with  advancing  years  or  with  failing 
health.  It  is  often  difficult  to  find  one  buyer  willing  to  in- 
vest the  capital  needed  to  acquire  a  large  established  busi- 
ness, whereas  many  persons  are  ready  each  to  put  in  small 
sums  if  there  is  outlook  for  good  returns.  They  are  especially 
attracted  either  to  an  established  business  having  reputation 
("good  will")  and  a  record  of  yielding  good  incomes,  or  to 
a  new  business  in  which  the  prime  movers  and  investors  are 
men  of  known  ability  and  success. 

Advantage  is  taken  of  this  fact  by  active  business  men,  in 
fair  and  in  unfair  ways,  and  throughout  the  nineteenth  cen- 
tury the  corporate  organization  proved  to  be  best  fitted  to 
attract  large  amounts  of  capital  for  the  great  industrial,  mer- 
cantile, and  transportation  enterprises.  Usually  these  cor- 
porations were  organized  by  and  around  some  one  man  or 


Ch.  26]  ENTERPRISE  325 

group  of  men,  who  either  actually  paid  for  stock,  or  issued  it 
to  themselves  in  payment  for  the  promotion  of  the  undertak- 
ing, retaining  thus  a  majority  of  the  voting  power  for  them- 
selves (each  share  having  one  vote).  One  share  over  half  is 
the  utmost  needed  for  "control,"  and  when  the  holdings  are 
scattered  in  small  amounts  among  stockholders,  a  very  much 
smaller  proportion  is  enough — sometimes  as  little  as  5  per 
cent.  The  control  may  give  the  power  to  one  man  to 
elect  himself  to  be  president  or  general  manager  with  power 
to  fix  his  own  salary  and  to  appoint  the  other  employees, 
and  to  control  much  in  the  way  he  could  if  absolute  owner. 

The  capital-income  from  the  stock  he  owns  may  be  of  slight 
importance  to  him  compared  with  the  control.  There  have 
been  many  ways  in  which  the  control  of  an  industrial  or 
transportation  corporation  gave  opportunities,  increasing  with 
the  size  of  the  enterprise,  for  the  man  in  control  and  his 
friends,  to  get  large  additional  incomes.  Many  of  these  ways 
were  plainly  illegal,  others  unquestionably  unfair,  and  still 
others  in  the  debatable  border  zone  of  morality.  These  make 
up  a  large  part  of  the  so-called  "corporation  problem."  It 
is  not  the  place  here  to  discuss  that;  we  wish  merely  to  show 
the  nature  of  the  incomes  arising  under  corporate  organiza- 
tion. 

§  9.  Single  investment  function  of  minority  stockhold- 
ers. A  minority  stockholder  who  practically  has  no  option 
but  to  vote  for  the  officers  nominated  by  the  group  in  control, 
has  in  investing  but  one  decision  to  make:  whether  to  risk 
his  capital  in  that  enterprise  managed  by  that  group  of  men. 
The  only  corporations  that  attract  large  numbers  of  minority 
stockholders  are  such  as  for  a  number  of  years  have  paid  regu- 
lar dividends,  have  followed  a  pretty  definite,  well-understood 
policy,  and  have  in  large  measure  gained  and  deserved  con- 
fidence. The  Pennsylvania  and  the  New  York  Central  may 
be  named  as  examples  among  railroads,  whereas  the  New 
Haven,  which  up  to  about  1910  was  in  the  same  class,  showed 
how  swift  and  how  great  may  be  the  losses  inflicted  upon 


326  ENTERPRISE  AND  PROFIT  [Pt.  V 

minority  stockholders  as  a  result  of  a  change  of  policy  by 
those  in  control. 

The  minority  stockholder,  while  he  may  have  no  voice  prac- 
tically in  electing  the  management,  nevertheless  in  his  invest- 
ment bears  his  full  share  of  the  risk  of  financial  loss  (indeed, 
he  bears  even  more  than  his  due  fractional  share  of  risk). 
The  stockholders  collectively  make  the  initial  investment,  that 
which  bears  the  main  burden  of  the  financial  risk  (not  all, 
for  the  other  contractual  income-receivers  are  not  absolutely 
secure),  and  they  receive  their  non-contractual  income  as  a 
legally  residual  share  after  all  other  outlays  have  been  made. 

Thus  it  appears  from  the  foregoing  survey  that  the  pe- 
culiar function  of  enterprise  is  investment  and  ownership. 
In  many  cases  still  to-day,  the  functions  of  enterprise  and  of 
management  are  united  in  one  person,  who  thus  obtains  an 
income  that  is  a  complex  of  an  investment  profit  and  a  labor- 
income.  In  other  cases,  however,  the  management  function 
is  delegated  to  an  employee,  the  hired  manager,  in  which  case 
the  enterprise  and  the  management  functions  are  more  clearly 
distinct  because  exercised  by  different  persons.  It  is  our  task 
next  to  study  more  closely  the  function  of  management. 


CHAPTER  27 
MANAGEMENT 

§  1.  The  function  of  management.  §  2.  Direction  of  simple  and  in- 
terrelated groups.  §  3.  Selection  of  managed  and  of  managers.  §  4. 
Division  of  labor  in  management.  §  5.  A  large  commercial  policy.  §  6. 
Obtaining  of  capital.  §  7.  Profit-seeking  borrowers  and  the  rate  of  inter- 
est. §  8.  Buying  materials  and  labor.  §  9.  Various  policies  to  up- 
build the  personnel.  §  10.  Management  of  technical  processes.  §  11. 
Management  of  men.  §  12.  The  right  proportioning  of  the  factors.  §  13. 
Adjustment  of  production  to  changing  conditions. 

§  1.  The  function  of  management.  The  owner  of  a  fund 
of  purchasing  power  can  not  leave  it  to  invest  itself.  The 
primary  function  of  enterprise  is  the  choice  of  a  business  in 
which  to  invest;  the  next,  and  essentially  last  function,  is 
to  provide  competent  management.  Every  act  of  labor  and 
every  use  of  goods  calls  for  some  decision  and  direction.  This 
is  management,  which  is  one  of  the  forms  and  aspects  of  labor, 
quite  easily  distinguishable  from  mere  physical  action.  In 
the  simplest  kinds  of  individual  production  the  amount  and 
quality  of  the  goods  obtained  depend  on  intelligent  choice 
often  far  more  than  on  physical  force.  Even  for  the  solitary 
worker  the  choice  of  the  right  time,  kind,  place,  and  method 
of  work  is  most  important.  The  first  thing  Robinson  Crusoe 
did  was  to  go  to  the  ship  and  to  save  as  much  as  possible  of 
the  cargo  before  it  was  dashed  to  pieces  by  the  waves.  If 
he  had  begun  first  to  till  the  soil  to  provide  a  future  supply 
of  food  it  would  have  shown  foresight,  but  very  poor  judg- 
ment. Every  moment  of  delay  in  recovering  the  «argo  of 
the  wrecked  vessel  cost  him  many  useful  materials.  The 
humblest  farmer  has  a  great  range  of  choice  and  a  need  of 

327 


328  ENTERPRISE  AND  PROFIT  [Pt.V 

good  judgment  in  fixing  the  time  to  sow,  to  reap,  to  do  each 
simple  task.  There  is  the  same  need  to-day  for  small  pro- 
ducers of  all  kinds,  whether  shopkeepers  or  blacksmiths,  to 
make  wise  choice  of  time  in  the  use  of  their  own  labor.  There 
is  also  a  wide  range  of  choice  in  the  distributing  and  com- 
bining of  labor,  agents,  and  materials.  A  limited  supply  of 
agents  can  be  used  to  secure  a  variety  of  goods,  more  or  less 
desirable.  There  is  a  choice  in  ways  and  methods  by  which  a 
thing  may  be  done.  There  are  many  wrong  ways,  there  is 
but  one  best  way,  at  any  stage  of  industrial  progress.  While 
most  work  is  done  in  customary  ways  and  little  independent 
judgment  is  required,  yet  in  every  kind  of  industry  new  prob- 
lems constantly  arise  and  call  for  the  exercise  of  choice  as  to 
methods.  Moral  qualities  are  continually  called  for,  such  as 
control  of  impulse  and  the  giving  up  of  the  comfort  of  the 
moment.  The  wisdom  of  our  fathers  is  embodied  in  a  multi- 
tude of  proverbs  that  suggest  the  wise  course.  Men  must 
"make  hay  while  the  sun  shines,"  and  "plow  deep  while  slug- 
gards sleep."  But  virtue  fails  less  often  from  lack  of  knowl- 
edge than  from  lack  of  will.  As  men  differ  in  judgment, 
character,  and  will-power,  their  products  differ,  even  in  the 
simplest  circumstances.  The  ability  to  choose  and  to  do 
wisely  is  an  element  in  personal  skill  in  every  economic  activ- 
ity. This  quality  in  the  man  is  managing  ability,  and  the 
action  of  directing  economic  activity  is  business  management. 
§  2.  Direction  of  simple  and  of  interrelated  groups. 
"When  men  work  in  an  associated  group,  the  direction  of 
effort  becomes  relatively  more  important.  The  first  and 
simplest  advantage  of  association  is  working  in  unison.  Men 
unite  their  muscular  efforts  for  a  single  task,  and  accomplish 
what  is  impossible  to  them  working  singly.  There  must,  how- 
ever, be  a  foreman  to  call  out  "heave  ho,"  or  to  lead  the  song, 
or  to  set  the  stroke  for  the  oarsmen.  "When  many  are  work- 
ing together,  good  judgment  in  the  selection  of  time  and  way 
yields  larger  results  and  a  mistake  wastes  more  materials  and 
agents  than  when  each  works  for  himself.     If  association  is 


Ch.  27]  MANAGEMENT  329 

to  yield  its  advantages,  it  must  go  further  than  working  in 
unison  at  a  single  task ;  there  must  be  division  of  labor,  hence 
harmony  of  effort,  hence  agreement  and  direction  within  the 
industry.  While  the  gain  of  well-directed  association  is 
large,  the  waste  of  ill-directed  effort  is  greater  when  specializa- 
tion has  taken  place,  than  with  isolated  workers.  Most  com- 
munal societies  have  failed  because  of  the  lack  of  a  good  head. 
The  few  exceptional  successes  have  been  due  to  the  presence  of 
a  man  of  superior  ability,  such  as  George  Rapp  of  the  Har- 
monist Community,  who,  had  he  lived  in  this  day,  could  have 
easily  become  the  head  of  a  great  business  corporation. 

When  various  industrial  groups  are  associated,  direction  be- 
comes still  more  important  and  the  need  grows  for  high  ability 
to  manage  and  direct  the  great  units  of  industry.  In  the 
single  group  it  is  an  internal  harmony  alone  that  is  needed. 
The  work  of  a  dozen  men  must  be  so  arranged  that  each  is  in 
his  fitting  place.  But  as  this  group  comes  into  contact  with 
others,  the  relationship  becomes  twofold,  and  there  must  be 
both  internal  and  external  harmony.  Outlook  upon  business 
conditions  and  commercial  ability  become  necessary.  The 
more  complex  the  economic  organization  of  society,  the  greater 
the  chance  of  mistake  and  the  more  injurious  are  the  mistakes 
to  a  wide  range  of  interests.  Large  amounts  of  wealth  and 
labor  can  be  rapidly  lost  through  lack  of  wise  direction  of  an 
associated  group. 

§  3.  Selection  of  managed  and  of  managers.  Ever  since 
the  beginning  of  human  society  some  degree  of  organization 
of  industry  has  existed.  In  every  community  by  some 
method,  however  crude,  a  practical  way  has  been  found  of 
determining  who  shall  organize  and  manage  the  factors  of 
production,  and  who  shall  work  under  direction.  Economic 
organization  has  always  been  more  or  less  connected  with  and 
affected  by  political  organization,  and  in  many  ages  has  had 
a  distinctly  political  character  through  the  institutions  of 
slavery,  serfdom,  caste,  and  heredity  in  politics.  But  in  mod- 
ern times,  under  conditions  of  political  freedom,  this  classi- 


830  ENTERPRISE  AXD  PROFIT  [Vt.  V 

fying  of  men  so  that  those  less  capable  of  managing  indus- 
try come  under  the  direction  of  those  who  on  the  whole 
are  more  capable,  has  grown  more  and  more  economic  and 
competitive.  This  selection  is  often  unsatisfactorily  done  no 
doubt,  through  the  quips  of  chance  and  through  many  influ- 
ences of  personal  favor  and  political  injustice.  In  most  cases, 
however,  the  selection  is  of  a  very  exact  and  effective  sort. 
The  need  of  organizing  industrial  forces  is  so  great  that  any 
method  that  works  at  all  is  better  than  no  method.  The  man 
who  shovels  dirt  must  do  it  at  the  right  time  and  place  if, 
in  this  complex  society,  it  is  to  count  for  something  and  give 
the  effort  value.  If  he  can  not  choose  well  for  himself,  he 
comes  under  direction.  The  average  man  can  not  decide 
nearly  as  well  here  as  he  could  on  a  desert  island  where  and 
when  to  put  in  his  spade.  There  it  would  be  to  raise  food  for 
the  current  year;  here  it  may  be  to  dig  a  canal  or  a  tunnel 
whose  uses  will  not  become  actual  for  many  years.  The  more 
distant  the  end  sought,  the  more  difficult  is  the  choice.  To 
every  worker,  according  to  his  personal  skill,  is  left  some  de- 
gree of  choice  in  the  method  of  his  work,  but  in  a  large  part 
of  industry  the  range  of  choice  is  very  narrow.  The  man  with 
the  shovel  and  the  man  with  the  hoe  come  under  direction. 
Likewise  there  is  a  constant  process  of  selecting  and  ad- 
vancing the  efficient  managers.  There  is,  to  be  sure,  an 
element  of  chance  in  this  selection.  The  process  in  gen- 
eral is  a  rude  one.  Accidents  and  unforeseen  changes,  indus- 
trial crises,  failure  of  health  at  a  critical  moment,  fraud  and 
crime,  may  defeat  men  of  ability  and  they  may  never  regain 
their  foothold.  I\Ien  that  have  worked  their  way  up  from  the 
ranks  bequeath  their  business  positions  to  their  sons  and 
grandsons.  Lack  of  experience  may  lead  to  disaster  a  nat- 
urally able  but  youthful  heir,  too  suddenly  burdened  with  the 
responsibilities  of  a  business.  On  the  other  hand,  men  of 
limited  ability  may  inherit  fortunes  and  preserve  them  by 
caution,  without  much  energy  or  ability.  Often  they  retain 
the  investment  while   delegating  the  management   to   more 


Ch.  27]  MANAGEMENT  331 

capable  hands.  It  is  not  always  true,  even  in  America,  that 
"it  is  but  three  generations  from  shirt-sleeves  to  shirt- 
sleeves," altho  many  fortunes  slip  away  from  the  sons  of 
rich  fathers.  In  general,  success  in  retaining  either  the  con- 
trol or  the  active  management  of  a  business  is  an  evidence 
of  considerable  ability.  By  loss  of  fortune  unwisely  risked, 
through  unforeseen  changes  in  methods,  and  after  manifold 
blunders,  the  less  capable  drop  out.  Thus,  by  the  ceaseless 
working  of  competition,  the  higher  places  are  taken  by  those 
fairly  capable  of  filling  them,  and  the  efficiency  of  the  man- 
agement of  business  as  a  whole  is  maintained  or  increased. 

§  4.  Division  of  labor  in  management.  The  management 
of  industry  does  not  usually  show  itself  in  entirely  simple 
forms.  The  directing  power  in  an  establishment  is  not  always 
exercised  by  one  person,  but  usually  by  a  number  of  persons. 
When  there  is  a  single  owner,  he  most  often  is  the  manager. 
(See  Chapter  26.)  There  is  a  virtue  in  this  union  of  financial 
responsibility  with  practical  control  that  favors  its  survival 
despite  various  limitations.  But  men  are  constantly  failing  in 
health,  advancing  in  years,  or  becoming  unfitted  to  meet  new 
conditions  after  acquiring  fixed  habits  of  business.  Partner- 
ships often  are  formed  by  an  older  man  taking  into  the  busi- 
ness a  younger  man  who  might  assume  duties  of  active  man- 
agement. Yet  the  frequent  difficulty  of  partnerships  is  an 
old  story.  * '  We  went  into  partnership.  I  supplied  the  money 
and  he  supplied  the  experience.  When  we  quit  he  had  the 
money  and  I  had  the  experience." 

Some  minor  functions  of  direction  must  be  given  to  fore- 
men when  there  are  even  a  few  employees;  in  larger  estab- 
lishments the  men  are  constantly  being  tested  and  promoted 
to  higher  positions,  becoming  partners,  or,  in  a  corporation, 
officials.  The  "indoor  man"  and  the  "outdoor  man"  are 
clearly  marked  types.  INIany  a  man  succeeds  admirably  in 
minor  tasks  of  direction,  but  has  his  limitations  whether  due 
to  natural  endowment  or  to  defects  of  education.  A  man  may 
have  just  the  qualities  fitting  him  to  manage  a  small  gang  of 


332 


ENTERPRISE  AND  PROFIT 


[Pt.V 


men  whom  he  can  see,  know,  and  direct  personally,  but  be 
unable  to  succeed  where  some  power  of  imagination  and  some 
ability  at  constructive  planning  is  required.  A  good  depart- 
mental head  may  be  a  poor  general  manager, 

I  ENTERPRISER   j 
f       MANAGER      \ 


ffelNG^ECR 1      I    SUPT    PROQ)       I        ^HELMIST       I 


Fig.   39.     Functional  oe   Staff   Organization.* 

*  Division  of  labor  and  specialization  in  management  may  be  by  some 
such  plan  as  is  here  graphically  shown.  The  foreman  may  receive  di- 
rections regarding  the  machines  and  their  operation  from  an  engineer, 
regarding  special  chemical  processes  from  an  industrial  chemist,  and 
regarding  other  matters  from  the  superintendent  of  production.  A 
modification  of  this  plan  is  shown  below  in  fig.  40. 

§  5.  A  large  commercial  policy.  The  highest  function  of 
the  management,  that  which  properly  is  performed  by  the 
chief  of  the  organization,  is  to  form  the  general  commercial 
policy  of  the  enterprise.  Every  active  investment  is  made  in 
some  generally  predetermined  line — it  is  merchandise,  agri- 
culture, manufacture,  transportation,  etc.,  and  more  spe- 
cifically is  wholesale  stationery,  general  farming,  iron  making, 
teaming,  etc.  From  the  moment  the  general  investment  is 
made  the  management  begins  to  exercise  the  power  delegated 
by  the  enterpriser,  investing  and  reinvesting,  shaping  and  re- 
shaping the  business  in  accordance  with  a  continuous  policy. 
In  a  degree  varying  with  the  kind  and  si^e  of  the  business, 
demand  must  be  anticipated.  The  trend  of  changing  fashion, 
in  engineering  as  well  as  in  dress,  the  shifting  of  demand  for 
products,  must  be  foreseen  and  prepared  for  not  too  rashly  or 
too  cautiously.  The  process  in  every  kind  of  undertaking, 
that  of  buying  and  selling,  as  well  as  that  of  manufacturing, 


Ch.  27] 


MANAGEMENT 


333 


requires  time.  Materials  and  labor  are  to  be  embarked  in 
directions  from  which  they  can  not  be  recalled.  The  widening 
or  narrowing  of  the  scope  of  the  enterprise  (as  to  variety  of 
goods,  extent  of  the  market  sought,  etc.)  and  the  enlargement 
or  reduction  of  the  size  of  the  plant,  are  decisions  wisely  made 
only  by  a  mind  with  a  large  business  outlook.     The  larger 

1 5T0CW0LDER5  -ENTERPRISERS  t 
1        DIRECTORS  ~| 

^T 


I     foreman!         I      rOREM/AN    I  I     rOR^AN       t 

6666     ^66     6666 

WORKMEN  VAO^KHEN  WORKMEN 

Fig.  40.  Modified  Functional  ORaANizATiON.* 
*  This  is  an  attempt  in  large  enterprises  to  unite  the  benefits  of  spe- 
cialization with  directness  and  unity  of  responsibility.  The  president  is 
responsible  for  the  larger  policies,  and  to  him  are  responsible  directly 
such  officials  as  treasurer,  chief  salesman,  chief  engineer,  and  factory 
manager.  By  the  work  of  committees  and  conferences  the  various  func- 
tions and  departments  are  brought  into  cooperation  as  far  as  is  neces- 
sary and  practicable,  and  the  eye  of  the  specialist  is  on  every  part  and 
process  of  the  business. 

the  investment  and  the  more  complex  and  distant  the  factors, 
the  greater  is  the  difference  of  loss  or  of  gain  made  by  the 
manager's  judgment.  The  man  who  has  the  ability  to  do 
this  exceptionally  well  in  the  largest  business  merits  the  title 
of  a  "  captain  of  industry. ' '  He  is  not  a  mere  employee  of  in- 
vestors, but  a  prominent  personality,  whom  investors  follow, 
eager  to  assume  the  financial  risk  under  such  leadership.^ 

1  Among   the   men   receiving   salaries   of   $100,000   a   year    or   more 
in  the  United  States  in  1914  were  the  following:     Pope  Yeatman,  ex- 


334  ENTERPRISE  AND  PROFIT  [Pt.V 

A  special  type  of  manager  is  the  promoter,  who  makes  a 
plan  of  enterprise  and  tries  to  interest  men  of  capital  to  invest 
in  it  actively.  The  promotion  may  be  either  of  a  new  enter- 
prise of  a  competitive  nature,  or  of  a  combination  to  create  a 
monopoly  out  of  existing  enterprises.  The  latter  is  the  case  of 
promotion  most  frequently  spoken  of,  and  it  may  be  discussed 
with  the  trust  problem.  The  promoter  as  such  is  a  manager 
in  the  initial  stage  of  the  enterprise  only.  He  is  the  moving 
spirit  who  offers  his  services  to  the  investors,  who  are  to  per- 
form the  enterprise  function. 

§  6.  Obtaining  of  capital.  The  conduct  of  any  business 
may  be  thought  of  as  consisting  of  three  parts,  or  processes: 
(1)  buying,  (2)  alteration  (i.e.,  recombination,  elaboration, 
change  in  form,  place,  and  time),  (3)  selling.  These  are 
continuous  until  the  last  sale  is  made  and  the  whole  business 
is  ended.  Buying  and  selling  make  up  nearly  all  of  mercan- 
tile business,  alteration  being  subordinate ;  whereas  alteration 
is  the  most  striking  feature  of  manufacturing,  in  which  buying 
and  selling  appear  (often  mistakenly)  to  be  quite  unim- 
portant. 

Almost  every  business  to-day  requires  from  time  to  time  ad- 
ditions of  capital,  temporary  or  permanent.  Frequent  use 
must  be  made  of  credit.  The  confidence  and  support  of  lend- 
ers, whether  banks,  trust  companies,  individual  shareholders, 
or  investors  in  bonds,  must  be  secured  by  the  management. 

pert  mining  engineer  for  the  Guggenheims ;  Theodore  P.  Shonts,  civil 
engineer,  president  of  the  Interborough  Metropolitan  Co.,  in  control 
of  the  great  rapid  transit  system  of  New  York  City;  Theodore  N.  Vail, 
president  of  American  Telephone  and  Telegraph  Co.  (the  Bell  telephone)  ; 
Lewis  E.  Pierson,  banker,  president  of  the  Irving  Exchange  National 
Bank,  New  York;  Samuel  Insnll,  president  of  the  Commonwealth  Edison 
Company,  which  controls  nearly  the  whole  electric  system  in  Chicago; 
William  M.  Wood,  president  of  the  American  Woolen  Company,  owning 
forty  mills;  and  David  W.  Griffith,  manager  of  the  Mutual  Film  Cor- 
poration, of  Los  Angeles,  manufacturers  of  moving  pictures.  See  articles 
on  $100,000  salaries,  in  McClure's,  April  to  October,  1914,  by  E.  M. 
WooUey. 


Ch.  27]  MANAGEMENT  335 

Good  judgment  of  the  money  market  often  is  as  vital  as  judg- 
ment of  the  market  for  the  particular  product.  In  some  of 
the  largest  corporate  enterprises  this  quality  becomes  the  most 
essential,  so  that  financial  "influence,"  consisting  of  personal 
or  official  relations  with  large  financial  institutions,  comes 
to  outweigh  in  importance  most  other  qualities  of  management. 
This  is  in  part  the  explanation  both  of  the  growth  and  of  the 
evil  of  "interlocking  directorates."  A  similar  power  to  get 
special  privileges  and  opportunities  from  national,  state,  and 
city  legislatures,  in  the  form  of  favoring  tariffs  or  of  public 
franchises,  is  important  for  the  success  of  some  business  enter- 
prises, and  this  often  fosters  an  evil  conspiracy  between  bad 
politics  and  big  business. 

§  7.  Profit-seeking  borrowers  and  the  rate  of  interest. 
The  enterpriser  (and  his  agent,  the  manager)  is  essentially  a 
profit-seeking  (so-called  productive)  borrower.  He  does  not 
borrow  in  order  to  enjoy  more  in  the  present  in  exchange  for 
the  future.  He  borrows  to  earn  more  in  the  present,  to  spend 
when  he  pleases,  which  may  or  may  not  be  now.  The  money 
which  he  borrows  to  invest  in  business  he  uses  to  get  better 
machinery  or  a  larger  stock,  with  which  to  secure  a  better  or  a 
larger  product.  The  product  finally  being  sold  at  a  profit, 
the  enterpriser  is  at  a  point  where  he  can  spend  without  en- 
croaching upon  his  capital.  The  consumer  of  the  product 
pays  (or  is  expected  to  pay)  the  interest  included  in  the  price, 
and  the  final  consumer's  payment  for  enjoyment  must  be 
deemed  the  logical  source  of  the  money  interest.  The  business 
loan  is  made  in  view  of  the  rate  of  interest,  of  the  market- 
price  of  the  goods  in  which  the  loan  will  be  reinvested,  and 
of  the  probable  chances  for  earning  profits  in  the  business. 

Evidently  the  price  of  these  goods,  to  control  which  is  the 
real  object  of  the  loan,  is  a  general  market-price  reflection 
of  their  earning  power.  It  is  merely  the  sum  of  the  expected 
prices  they  will  yield,  capitalized  at  the  prevailing  rate  of 
time-premium.  But  earning  power  in  whose  hands?  Not  in 
everybody's,  for  the  price  of  the  factors  can  be  recovered  in 


336  ENTERPRISE  AND  PROFIT  [Pt.  V 

the  price  of  the  product  only  when  they  are  applied  to  certain 
uses.  Whoever  buys  anything  to  use  and  sell  again,  is  ven- 
turing his  judgment  that  he  can  make  at  least  as  much  in  the 
future  as  the  market-price  reflects,  and  possibly  more.  The 
borrower  expects  either  to  make  these  particular  goods  earn 
incomes  larger  than  those  on  the  basis  of  which  they  have  been 
capitalized,  or  to  transfer  them  to  an  economy  where  goods 
are  capitalized  at  a  higher  rate  than  he  is  paying.  The  income 
yielded  by  these  goods,  if  the  borrower's  expectation  is  ful- 
filled, is  but  the  difference  between  present  and  future  prices 
that  has  been  wrapped  up  in  their  capitalization.  As  time 
elapses  and  the  incomes  emerge  in  wisely  chosen  investments, 
the  borrower  has  a  surplus  large  enough  to  pay  the  contract 
interest.  It  appears,  therefore,  that  the  motive  of  the  bor- 
rower is  to  get  control  of  future  incomes,  at  prices  that  al- 
ready involve,  in  their  capitalization,  a  discount  of  the  future 
uses,  as  he  sees  them,  somewhat  greater  than  the  interest  he 
contracts  to  pay. 

§  8.  Buying  materials  and  labor.  The  large  classes  of 
goods  which  are  to  be  bought  are  equipment,  materials,  and 
labor.  In  the  main  the  prices  of  these  things  are  determined 
by  impersonal  forces  and  can  be  only  slightly  modified  by  a 
particular  buyer.  This  is  especially  true  in  the  case  of  many 
staple  goods.  The  manager  can  but  look  upon  the  price  of 
these  materials  as  fixed,  and  seek  to  combine  them  as  eco- 
nomically as  possible  into  other  products.  But  there  are  many 
special  patterns  and  qualities  which  have  no  true  market- 
price.  By  close  attention,  good  judgment,  skilful  bargaining, 
one  man  may  be  able  to  buy  slightly  cheaper  than  his  com- 
petitors, and  thus  have  an  advantage  over  them  at  the  outset. 
When  he  does  this,  it  is  usually  by  searching  out  a  better 
market  in  which  to  buy,  buying  at  a  better  time,  and  judging 
better  than  his  competitors  the  quality  of  the  goods. 

Failure  to  have  merchandise  in  stock  when  called  for,  and 
every  needed  material  in  stock  to  fill  orders  in  manufacture, 
is  an  occasion  of  great  loss.     On  the  other  hand,  keeping  more 


Ch.  27]  MANAGEMENT  337 

than  is  needed  is  a  useless  cost.  The  ability  to  buy  cheap  de- 
pends largely  on  being  able  to  use  a  large  quantity,  sparing 
the  seller  in  this  way  certain  usual  costs,  and  reducing  the 
costs  of  transportation  by  economies  in  large  shipments.  But 
buying  more  than  can  be  used  within  a  short  time  causes  costs 
for  storing,  insuring,  etc.,  loss  by  deterioration,  and  loss  of 
interest  on  the  investment.  Finding  the  golden  mean — just 
enough  and  not  too  much — is  one  of  the  arts  of  business  man- 
agement, and  requires  a  good  organization  of  the  purchasing 
department,  and  constant  watchfulness  both  in  mercantile  and 
in  manufacturing  business. 

Not  the  least  important  factor  to  be  bought  is  labor  of  every 
grade.  The  more  successful  business  men  are  not  found  usu- 
ally paying  less  than  their  competitors  for  the  various  grades 
of  workers.  Success  is  due  rather  to  utilizing  the  services  so  as 
to  make  them  more  effective.  The  chief  executive  of  a  large 
business  must  have  a  knowledge  of  men,  ability  to  judge  of 
human  nature,  to  select  his  subordinates,  and  to  animate  them 
with  his  own  purposes  and  plans.  Andrew  Carnegie  has  said 
that  an  appropriate  epitaph  for  himself  would  be,  "He  was 
a  man  who  knew  how  to  surround  himself  with  men  abler 
than  he  was  himself."  This  seems  too  modest;  but  in  a  sense 
it  is  not,  because  he  claims  for  himself,  and  justly,  the  highest 
of  all  industrial  qualities.  A  great  administrator  in  politi- 
cal or  industrial  affairs  can  dispense  with  everything  else 
rather  than  with  this,  the  supreme,  quality  of  the  great  exec- 
utive. 

§  9.  Various  policies  to  upbuild  the  personnel.  Different 
policies  for  developing  the  personnel  of  an  organization  are 
followed  in  different  enterprises.  In  some  there  is  "inbreed- 
ing," always  promoting  from  those  in  the  establishment;  in 
others  this  policy  is  followed  in  the  case  of  all  minor  places, 
but  higher  positions  are  filled  by  getting  "new  blood"  from 
outside;  in  others,  the  best  man  is  chosen  wherever  he  may 
be  found.  There  are  advantages  in  each  plan  and  correspond- 
ing disadvantages.     In  general  a  small  organization  needs  to 


338  EJfTERPRISE  AND  PROFIT  [Pt.  V 

look  outside  for  new  blood,  and  a  large  organization  can  more 
safely  fill  its  higher  positions  from  its  own  staff. 

Favoritism  in  appointments  very  quickly  causes  the  degen- 
eration of  the  management  of  any  organization.  The  inferi- 
ority of  public  industry  must  be  largely  attributed  to  political 
favoritism,  involving  the  spoils  system  with  its  usual  accom- 
paniment, insecurity  of  tenure.  Every  government,  national, 
state,  city,  and  county,  has  a  good  many  business  matters  to 
attend  to.  In  Germany,  where  the  municipal  governments 
have  been  such  models  of  efficiency,  the  policy  in  engaging 
managerial  ability  is  much  like  that  of  good  corporate  business 
in  America.  The  mayor  is  a  professional  business  manager, 
who  prepares  for  the  work  as  he  would  for  medicine  or  for 
engineering.  A  city  employs  a  mayor  who  has  had  experience 
and  has  shown  success  in  the  administration  of  a  smaller  city 
in  any  part  of  the  empire.  A  beginning  has  been  made  in 
America  in  calling  men  from  other  states,  to  serve  as  munici- 
pal 'experts  or  to  be  heads  of  some  state  enterprises,  commis- 
sions, and  institutions  (such  as  public  school  system,  state 
university,  prisons,  philanthropies,  etc.),  and  this  use  of  the 
merit  system  is  extending  in  the  national  service  of  health, 
forestry,  irrigation,  etc.  This  policy  must  develop  if  the  pub- 
lic service  is  to  become  efficient. 

Private  business  is  not  immune  to  the  disease  of  favoritism, 
which  in  some  of  the  railroads  and  of  the  industrial  corpora- 
tions is  a  serious  hindrance  to  efficient  operation.  It  is  said 
that  in  some  parts  of  the  country  getting  even  a  minor  position 
on  a  railroad  depends  upon  having  a  "pull"  with  an  official; 
directors  provide  their  poor  relations  jobs  as  brakemen  and 
conductors.  The  efficiency  of  American  railroads  in  general, 
however,  is  doubtless  due  in  large  part  to  the  wide  open  market 
for  talent  in  management.  A  good  shop  foreman  or  a  good 
master  mechanic  in  any  part  of  the  country  may  hope  to  get 
a  better  position  either  on  that  road  or  on  another.  And  to 
make  a  success  as  a  division-superintendent  or  as  president  on 
a  small  road  is  to  become  a  possible  candidate  for  a  larger 


Ch.  27]  MANAGEMENT  339 

superintendeney,  or  for  a  vice-presidency  or  for  the  presidency 
of  one  of  the  larger  systems. 

§  10.  Management  of  technical  processes.  The  manage-: 
ment,  directly  or  by  the  aid  of  other  employees,  must  choose 
the  general  processes  to  be  used,  the  kinds  of  machinery,  the. 
order  and  arrangement  of  it,  the  kinds  of  materials,  and  the 
various  technical  processes,  chemical  and  mechanical,  by  which 
these  are  to  be  manipulated.  The  factors  bought — equip- 
ment, materials  and  labor — are  to  be  skilfully  and  eco- 
nomically combined  to  secure  a  product  worth  more  than 
it  cost.  Indeed,  the  very  buying  of  them  in  certain  quan- 
tities and  of  certain  qualities  implies  and  requires  a  deci- 
sion more  or  less  exact,  as  to  how  they  will  be  used.  For 
the  performance  of  this  task  of  combining  the  factors  the 
management  must  have,  somewhere  in  the  personnel,  adequate 
technical  knowledge  of  methods,  processes,  and  materials,  and 
experience  in  the  art  of  applying  the  knowledge.  In  small 
undertakings,  the  owner-manager  must  personally  embody 
these  qualities,  but  in  more  complex  organizations  the  chief 
executive  may  do  without  all  but  the  broadest  knowledge  and 
ability  to  judge  of  the  results  of  different  processes,  and  to 
compare  different  plans.  The  technical  knowledge  of  details 
must  be  supplied  by  numerous  specialists,  working  under  his 
direction — engineers,  draftsmen,  pattern-makers,  chemists,  me- 
chanics, efficiency-experts,  cost-accountants,  etc. 

§  11.  Management  of  men.  The  management  must  also 
choose  and  direct  the  corps  of  workers.  Workmen  must  be 
selected  with  a  due  degree  of  skill,  but  not  of  a  grade  of  skill, 
and  therefore  of  wage,  higher  than  is  needed  for  the  task.  In 
a  small  business  a  manager's  tact  in  handling  men  is  one  of 
the  most  important  qualities,  and,  as  the  organization  grows, 
foremen  with  managing  tact  must  be  hired.  In  one,  it  is  a 
genial  manner  that  wins  the  affection  of  the  men ;  a  sense  of 
humor  and  ability  to  turn  a  joke  smooths  many  a  difficulty  and 
is  said  to  have  obviated  many  a  strike.  In  another,  a  dignified 
but  sympathetic  attitude  toward  the  men  is  equally  effective. 


340  ENTERPRISE  AND  PROFIT  [Pt.  V 

Not  infrequently  after  a  new  superintendent,  experienced  and 
capable  in  mechanical  matters,  has  taken  charge  of  a  large 
shop,  the  use  of  materials  increases,  the  output  falls  off,  and  a 
strike  follows.  The  explanation  in  such  cases  usually  is  that 
the  new  manager  mistakes  a  smooth  working,  efficient  organiza- 
tion for  a  slow  moving  one.  It  does  not  rattle  and  creak  as 
he  thinks  it  ought,  and  he  begins  to  prod  and  irritate  the  men. 
The  reverse  may  happen,  when  a  new  manager  coming  into 
a  difficult  situation  replaces  discord  with  harmony,  increases 
wages  per  man  but  reduces  greatly  the  cost  per  piece,  and  then 
has  a  continual  struggle  to  convince  his  superiors  in  authority 
that  he  is  not  making  it  too  easy  for  the  men  at  the  expense 
of  the  company.  Of  late  it  has  been  more  and  more  clearly 
recognized  that  emphasis  had  been  laid  too  exclusively  upon  the 
manipulation  of  machinery  and  material  as  a  means  of  attain- 
ing efficiency  in  production.  The  rapid  growth  of  large  in- 
dustry under  corporations,  separating  the  men  from  those  in 
authority,  has  helped  to  bring  this  about.  It  is  now  seen  that 
the  management  of  the  human  material  is  just  as  much  a  part 
of  technical  efficiency  as  is  engineering  science  or  skill  in  the 
technical  arts. 

§  12.  The  right  proportioning  of  the  factors.  The  right 
proportioning  and  skilful  substitution  of  the  factors  is  a  deli- 
cate technical  task  for  the  management.  The  enterpriser  must 
constantly  study  the  question  whether  the  application  of  an- 
other unit  of  any  one  factor  at  the  price  will,  following  the 
principle  of  proportionality,  add  to  value  of  the  product  as 
much  or  more  than  the  cost.  This  calculation  is  made  for 
every  one  of  the  minor  factors  entering  into  the  business,  and 
for  the  business  as  a  whole.  The  proper  proportion  varies 
at  different  prices,  or  costs.  If  wages  rise,  ''it  pays"  to  get 
machinery ;  if  wages  fall,  it  pays  to  let  some  of  the  machinery 
deteriorate  and  to  do  more  by  hand-labor.  Likewise  there  is 
constant  substitution  of  the  various  materials.  The  right  pro- 
portions change  constantly  with  inventions.  A  model  factory 
is  so  proportioned  that  the  buildings  hold  the  right  number 


Ch.  27]  MANAGEMENT  341 

of  machines,  with  the  right  amount  of  space  for  the  workmen, 
and  the  right  amount  of  power.  If  there  is  more  of  a  single 
factor  than  the  ideal  proportion,  it  is  an  unnecessary  cost. 
Even  the  model  factory  begins  to  be  out  of  date  almost  as  soon 
as  the  walls  are  dry,  and  the  method  now  is  to  build  as  nearly 
as  possible  on  the  unit  system,  so  that  new  parts  may  be 
added  without  the  loss  of  harmony  and  proportion. 

§  13.  Adjustment  of  production  to  changing  conditions. 
In  the  adjustment  of  processes  to  changing  market  conditions, 
many  opportunities  for  business  judgment  are  presented.^ 
The  agents  employed  in  any  industry  range  from  the  more 
valuable  down  to  the  less  valuable  grades  in  a  more  or  less 
regular  series.  As  the  place  of  agents  on  the  scale  of  efficiency 
is  constantly  shifting,  the  various  agents  represent  all  grades. 
One  depreciates,  possibly  is  restored  later  and  takes  a  high 
place,  and  again  depreciates,  until  finally  it  is  thrown  out  of 
use.  One  loom  embodies  the  latest  improvements  and  cor- 
responds to  the  most  fertile  field ;  another  can  still  be  made  to 
yield  a  little  income ;  the  use  of  a  third  results  in  certain  loss. 
A  great  mass  of  unused  agents  lie  just  below  the  margin  of 
utilization  in  every  industry.  Some  of  these  are  permanently 
abandoned;  some  will  be  taken  back  into  use  when  business 
conditions  improve.  "When  the  iron  industry  is  dull,  many 
forges  are  out  of  blast;  but  when  iron  is  again  in  demand, 
there  is  a  gradual  taking  up  of  the  abandoned  forges,  fac- 
tories, and  machines  as  they  are  brought  within  the  margin  of 
profitable  utilization.  Many  agents  not  actually  earning  an 
income,  may  do  so  through  a  change  in  business  conditions. 
Great  quantities  of  the  poorer  grades  of  wealth,  even  of  those 
things  that  are  relatively  fixed  in  quantity,  lie  unused.  Great 
areas  on  the  edge  of  civilization  still  await  the  pioneer,  the 
prospector,  and  the  miner. 

2  See,  for  example,  ch.  7,  sec.  6;  ch.  9,  sec.  11-13;  ch.  10,  sec.  8-9; 
ch.  11,  sec.  11;  ch.  12,  sec.  7-14;  ch.  13,  sec.  5,  7;  and  Part  VI  passim. 
The  opportunities  are  so  great  that  some  have  been  inclined  to  exag- 
gerate their  importance,  and  to  see  in  this  meeting  of  dynamic  condi- 
tions the  only  opportunities  for  profit. 


342  ENTERPRISE  AND  PROFIT  [Pt.V 

Here  is  a  source  of  wealth  and  a  field  for  enterprise,  to  take 
these  unused  things  or  things  imperfectly  used,  and  con- 
vert them  into  effective  agents.  A  rise  in  the  value  of  any 
agent  at  once  causes  an  attempt  to  duplicate  it  or  to  find  a 
substitute  for  it;  this  attempt,  if  successful,  puts  a  check 
upon,  or  sets  a  limit  to,  the  rise.  In  this  search  for  new  de- 
vices the  man  who  can  see  most  quickly  and  clearly  has  a  key 
to  wealth,  and  he  is  helping  to  meet  the  wants  of  his  fellows 
in  society.  Some  inventions  suddenly  increase  the  efficiency 
of  some  grades  of  goods  to  such  a  degree  that  less  efficient 
ones  are  thrown  out  of  use,  and  the  margin  of  utilization  is 
moved  to  a  higher  plane  than  it  was  on  before.  Improved 
types  of  machinery  in  the  progressive  establishments  displace 
the  older,  less  efficient  types,  which,  therefore,  more  or  less 
completely  lose  their  earning  power  long  before  they  are 
physically  worn  out.  The  wish  of  the  individual  is  to  raise 
the  efficiency  of  his  own  establishment,  but  in  doing  that  he 
affects  the  agents  owned  and  controlled  by  others.  Inven- 
tions and  improvements  gradually  become  common  property, 
and  increase  the  free  goods  and  free  uses  not  bearing  rent 
and  open  to  every  one.  One  who  improves  the  quality  of  a 
machine  or  the  economy  of  a  process  may  thus  unintentionally 
injure  some  of  the  owners  of  other  agents,  but  the  more  last- 
ing effect  is  to  increase  the  efficiency  of  all  agents  on  the 
margin  of  utilization. 


CHAPTER  28 
PROFITS  AND  COSTS 

§  1.  The  broader  meaning  of  profits.  §  2.  Conception  of  pure  profits. 
§  3.  Dual  character  of  investment  profit.  §  4.  Enterprise  and  risk. 
§  5.  Pure  profit  the  most  variable  income.  §  6.  Meaninga  of  cost. 
§  7.  Superficial  view  of  costs  and  prices.  §  8.  Costs  adjusted  to  prices 
of  products.  §  9.  A  single  factor  of  a  single  product.  §  10.  The  gene- 
alogy of  value.  §  11.  Money  cost  derived  from  price  of  products. 
§  12.  Cost  an  expression  of  consumers'  estimates.  Notes  On  other 
meanings  of  profit  and  The  source  and  cause  of  profits. 

§  1.  The  broader  meaning  of  profits.  The  term  profit 
(or  profits)  means  broadly  the  residual  share,  the  one  non- 
contractual income  in  the  business.  It  is  what  is  left  as  a 
net  gain  to  that  person  (or  group  of  persons)  who  assumes  the 
financial  risk  of  the  business,  after  paying  off  the  claims  of 
every  one  else  for  any  uses  or  services  rendered.  Profit  in 
this  broad  and  popular  sense  is  a  complex  of  incomes  from 
various  sources  and  must  fiuctuate  in  nature  (as  well  as  in 
amount)  from  case  to  case  for  reasons  that  are  accidental  and 
personal. 

We  may  see  this  in  reviewing  the  examples  above.  In  the 
small  furniture  shop  profits  includes  all  economic  incomes  in 
the  business,  whether  from  the  investment  or  from  the  joiner's 
own  labor.  It  is  an  inclusive  term  for  the  usances  of  tools, 
shop,  materials,  and  land,  and  for  the  services  of  the  owner, 
whether  as  investor,  manager,  or  handworker.  It  embraces 
all  the  economic  yields  which  by  theoretical  analysis  can  be 
carved  out  of  it.  As  the  business  develops,  profits,  as  thus 
used,  means  more  or  less  according  to  circumstances  which 
must  be  ascertained  from  the  context.  If  the  investor  owns 
all  his  buildings  and  land,  machinery,  and  sources  of  ma- 

343 


344  ENTERPRISE  AND  PROFIT  [Pt.  V 

terials,  and  has  no  borrowed  capital,  then  profits  includes  all 
that  is  left  of  cash  receipts  after  paying  wages  (and  salaries), 
but  wages  may  be  more  or  less  according  as  the  investor  takes 
a  more  or  less  active  part  in  the  management.  If  in  the  one 
business  the  buildings,  water  power,  lands,  etc.,  are  fully 
owned,  and  in  another  business  with  exactly  the  same  product 
all  these  things  are  hired,  profits  in  the  former  would  be  much 
greater.  While  the  business  is  owned  by  an  individual  or  by 
partners,  profits  may  include  whatever  is  attributable  to  the 
owner  for  his  management ;  or  a  fair  salary  may  be  estimated 
for  this,  and  only  the  remainder  be  counted  as  profits.  Like 
complications,  or  even  more  troublesome  ones,  are  found  in 
the  case  of  corporations.  The  one  company  owns  all  its  pat- 
ents, the  other  pays  royalties;  the  one  has  all  its  capital  rep- 
resented by  paid-up  stock  and  the  other  has  more  or  less  of 
outstanding  bonds  the  interest  of  which  is  a  "fixed  charge" 
to  be  deducted  before  counting  the  residual  share  of  profits. 
The  possible  variations  are  endless,  but  these  illustrations  suf- 
fice to  show  that  profit  in  any  such  general  sense  is  not  a  sci- 
entific term  for  the  purpose  of  studying  the  forms  of  income ; 
it  has  not  even  a  precise  practical  significance.^ 

§  2.  Conception  of  investment  profits.  Is  there  then,  no 
exacter  conception  of  profits  possible?  Among  these  various 
meanings  is  there  one  not  preempted  by  another  term,  one 
which  expresses  a  sort  of  income  found  in  practical  affairs, 
which  business  men  are  constantly  trying  to  estimate  and  of 
which  economists  must  take  account?  Let  us  try  to  express 
such  a  conception  in  this  definition :  Investment  profit  is  the 
income  attributable  solely  to  the  active  capital-investment 
in  the  particular  enterprise.  The  amount  and  rate  of 
investment-profit  is  peculiar  to  each  business  and  indeed  to 
each  investment.  It  is  never  an  agreed  price,  or  a  contractual 
payment.  It  is  the  residual  after  the  actual  contractual  dues 
have  been  paid,  and  the  estimated  value  of  the  non-contractual 
labor,  and  the  factor  of  management   (such  as  the  services 

1  See  note,  On  other  meanings  of  profit,  at  end  of  chapter. 


Cir.  28]  PROFITS  AND  COSTS  345 

of  officers,  etc.)  have  been  deducted.  The  investment 
profit  concept  is  most  nearly  exemplified  in  practical  affairs 
in  the  bookkeeping  of  a  corporation.  Out  of  gross  receipts 
must  be  paid  all  rents,  interest,  maintenance  and  deprecia- 
tion of  the  plant,  price  of  materials,  wages,  salaries  of  man- 
agers and  officers,  fees  of  directors,  etc.;  the  residue  is  the 
amount  which  may  be  paid  as  dividends  to  stockholders  (or 
added  to  surplus)  without  impairing  the  capital  investment. 
§  3.  Dual  character  of  investment  profit.  Even  invest- 
ment profit  usually  is  subjected  to  a  comparison  which  divides 
it  into  two  elements.  We  have  seen  (Chapter  26,  section  4) 
that  it  is  of  the  very  essence  of  the  active  capital  function  that 
it  takes  the  financial  risk  of  the  outcome.  When  therefore  at 
the  end  of  the  year  (or  income  period)  it  appears  that  a  certain 
profit  has  resulted  (say  $1000),  this  is  compared  with  the 
capital  invested  (say  $10,000)  and  expressed  as  a  percentage 
on  the  investment  (thus  10  per  cent).  Now  this  in  turn  is 
compared  with  the  rate  of  interest  common  on  the  safest 
loans  (say  4  per  cent)  and  the  remainder  is  the  amount  (or 
rate)  by  which  this  active-capitalist  investment  exceeds  the 
current  rate  of  passive  capital  investments.  This  merely  es- 
timated division  influences  further  choice  of  investment.  The 
rate  of  interest  is  taken  to  represent  about  what  capital  can 
do  by  itself  (or  with  a  negligible  amount  of  judgment  and 
supervision — an  abstract  conception)  and  the  excess  above 
that  is  attributed  to  the  successful  act  of  investment.  Thus, 
however  far  we  attempt  to  eliminate  the  personal  service 
element  of  management  from  profits,  there  always  remains 
in  any  active  capital  income  this  one  element  of  investing 
management  together  with  the  carrying  of  the  financial  risk. 
There  is  a  dual  character  in  investment  profit ;  it  is  a  capital- 
income  and  a  labor-income,  combined.  The  distinctive  fea- 
ture of  investment  profit,  which  fastens  our  attention,  is  pre- 
cisely this  excess  (or  deficit)  of  income  in  active-capital  as 
compared  with  the  normal  prevailing  rate  of  time-price,  which 
can  be  secured  by  the  most  conservative  passive  investor.    It 


346  ENTERPRISE  AND  PROFIT  [Pt.V 

is  the  hope  of  an  income  more  than  ordinary  interest  that  is 
the  inducement  to  active  capitalists  to  assume  the  risk.  We 
may  call  the  amount  realized  more  or  less  than  the  imputed 
yield  of  passive  investment,  pure  investment  profit,  attribu- 
table to  the  exercise  of  the  pure  investment  function.  The 
amount  may  be  expressed  as  a  rate  on  the  investment.  This 
is  the  utmost  point  that  has  been  attained  in  the  analysis  of 
the  complex  elements  of  "profits"  as  popularly  used.^ 

§  4.  Enterprise  and  risk.  To  the  person  who  exercised 
this  function  of  active  capital-investment  various  names  have 
been  applied:  undertaker,^  its  French  equivalent  entre- 
preneur, adventurer  (especially  used  in  former  times  of  one 
who  embarked  in  foreign  trade),  and  enterpriser.  Each  of 
these  was  meant  to  express  the  assumption  of  the  financial 
risk  in  undertaking  the  ownership  of  the  various  factors  and 
of  their  results  embodied  in  the  products,  in  paying  off  other 
claimants,  and  in  waiting  for  an  income  indeterminable  in 
advance,  but  contingent  on  all  the  various  fluctuations  of  the 
market. 

Enterprise  is  the  act,  or  function,  performed  by  the  enter- 
priser, and  in  a  different  but  related  sense  is  the  particular 
business  establishment,  or  undertaking,  which  is  carried  on 
by  an  enterpriser.  Business  management  and  enterprise  are 
functions  not  embodied  completely  in  any  individuals,  but 
diffused  more  or  less  among  groups  of  men.  The  active-cap- 
italist and  the  passive-capitalist  are  not  in  contrast  absolutely 
but  relatively;  the  passive  capitalist  is  not,  and  can  not  be, 
completely  freed  from  financial  risk.  Enterprise  is  merely 
in  this  particular  business  the  assumption  of  the  legal  finan- 
cial responsibility  to  the  extent  of  the  enterpriser's  credit  and 
resources,  or  in  other  cases  to  the  extent  of  the  special  legal 

2  See  note  on  The  source  and  cause  of  profits  in  economic  writings, 
at  end  of  chapter. 

a  The  old  English  word  undertaker,  once  so  used,  seems  to  have  been 
driven  out  by  a  rival  use;  perhaps  after  "funeral  director"  displaces 
it  there,  it  may  be  reclaimed  by  economics. 


Ch.  28] 


PROFITS  AND  COSTS 


347 


Pig.  41.     Gradations  or  Risk 

IN  COBPOKATE  INVESTMENT.* 


limited  liability,  as  (in  most  stock 
companies)  to  the  amount  invested, 
or  (often  in  banking)  to  double  the 
amount  invested. 

Risk  is  more  or  less  everywhere  in 
human  affairs,  but  among  various 
kinds  of  investments  there  is  a  well- 
recognized  gradation  in  the  uncer- 
tainty of  returns.  The  enterpriser 
in  a  business  takes  the  more  exposed 
frontier  of  risk,  and  the  various  senior  securities  have  prior 
claims.  For  example,  if  the  business  of  a  corporation  goes 
badly  the  first  mortgage  bonds,  getting  a  low  rate  of  interest, 
are  the  first  claim  on  the  income  and,  in  case  of  insolvency, 
these  bonds  would  be  paid  out  of  any  assets  of  the  company; 
so  in  turn  till  we  come  to' the  common  stock  which  gets  noth- 
ing until  all  the  other  claims  are  satisfied  but  which  if  the 
business  is  prosperous  may  get  dividends  at  any  rate  permit- 
ted by  profits.  There  is  thus  an  investment  risk,  an  element 
of  enterprise  even  in  the  safest  investment,  e.g.,  government 
bonds,  but  this  becomes  almost  negligible  in  the  case  of  many 
well-proven  investments.  This  relativity  of  risk  and  of  the 
enterprise  function  may  be  shown  again  in  the  interrelations 
of  different  enterprises.     (See  Figure  42.) 

§  5.  Pure  profit  the  most  variable  income.  It  is  easily 
seen  why  the  income  to  enterprise  is  the  most  variable  from 
one  establishment,  and  from  one  time,  to  another.  It  contains 
within  it  all  the  non-contractual  elements  of  income.  The 
laborer  has  taken  a  fixed  wage,  the  passive  capitalist  has  re- 
duced his  risk  and  accepted  a  fixed  interest.  Both  wage 
workers  and  passive  capitalists  have  taken  the  easy  way,  have 
"played  safe,"  and  have  left  the  enterpriser  to  bear  the  brunt 

*  The  rates  given  are,  of  course,  only  illustrative  of  the  proportions 
in  which  they  might  vary  in  a  particular  case.  In  fact  the  common 
stock  might  pay  no  dividends  for  years  while  dividends  and  interest  on 
fill  the  other  classes  of  securities  were  regularly  paid. 


348 


ENTERPRISE  AND  PROFIT 


[Pt.V 


of  the  financial  risk.  The  income  of  each  of  these  classes 
tends  to  conform  to  a  general  market-rate,  being  a  medium 
of  the  gains  and  losses  when  labor  and  capital  are  applied 
with  various  degrees  of  risk  in  various  undertakings.  Enter- 
prise is  the  most  movable  element.  It  is  specialized  risk-tak- 
ing.   Enterprise  has  well  been   called  an  economic   buffer, 


B 

Real  Esmre 


Enterprise 

A 

TcNflNT  Farming 


F 

WoF?K  FOR  Wasca 


Money  Lendii  iG 
C 


Threshing 
E 


Fio.    42.     Contractual    Relations    of    Various    Enterprises. 

Let  enterprise  A  be  tenant  farming,  for  which  are  needed  farm-land 
and  buildings,  borrowed  money,  and  the  uses  of  various  rented  machines. 
Enterprise  B  consists  of  buying  land  and  constructing  a  house,  shop, 
store-building  upon  it  to  let  to  enterprise  A.  The  enterpriser  in  this 
case  takes  the  risk  in  deciding  on  the  right  place,  kind  of  house,  ma- 
terials, etc.,  and  runs  a  chance  of  letting  it  or  being  without  a  tenant. 
Enterprise  C  is  private  money  lending,  or  a  bank-business,  lending  to  A. 
The  other  enterprises  receiving  contractual  payments  from  enterprise 
A  are  not  free  from  all  risk.  There  is  a  chance  that  the  agreed  payment 
will  not  be  made  and,  if  it  is,  that  loss  will  result  from  other  causes 
(e.g.,  a  fire  destroying  the  buildings).  Enterprisers  B  to  F,  however, 
in  relation  to  the  incomes  they  receive  from  and  through  A,  are  rela- 
tively protected  against  risk.  Enterpriser  A  in  paying  a  fixed  rent, 
a  fixed  interest,  etc.,  is,  to  the  extent  of  his  credit,  putting  up  a  margin 
of  security  against  the  failure  of  crops,  of  profits,  etc. 

which  takes  up  and  distributes  the  strain  resulting  from 
variations  in  the  momentum  and  rate  of  movement  of  in- 
dustry. The  enterpriser  feels  first  the  influence  of  changing 
conditions.    If  the  prices  of  his  products  fall,  the  first  loss 


Ch.  28]  PROFITS  AND  COSTS  349 

comes  upon  him,  for  the  goods  already  made  must  be  sold. 
Further  loss  is  avoided  as  best  it  can  be  by  paying  less  for 
materials  and  labor.  At  such  times  the  wage-earners  look 
upon  the  employer  as  their  evil  genius,  and  usually  blame 
him  for  lowering  their  wages,  not  the  public  for  refusing  to 
buy  the  product  at  the  former  high  prices.  "When,  however, 
prices  rise,  enterprise  gains  through  selling  at  higher  prices 
the  stock  on  hand  that  has  been  produced  at  low  cost.  Enter- 
prise is  placed  between  the  forces  of  competition,  between 
owners  of  resources  and  ultimate  consumers,  between  laborers 
and  the  final  purchasers  of  labor 's  services.  The  enterpriser 's 
economic  survival  is  conditioned  on  vigilance,  strength,  and 
self-assertion. 

Profits  therefore  fluctuate  more  from  industry  to  industry 
and  from  man  to  man  than  do  other  incomes.  The  variations 
of  the  market  may  sweep  away  not  only  all  ''profits,"  but  all 
the  invested  capital.  As  a  consequence,  profits  may  be  at 
other  times  very  high,  for  enterprise  will  not  take  the  risk 
of  great  losses  unless  there  is  a  chance  of  large  gains.  While 
the  income  of  the  salaried  man  is  occasionally  advanced,  and 
then  for  long  periods  remains  unchanged,  the  profits  of  enter- 
prise come  in  waves.  In  seasons  of  prosperity  profits  in 
many  enterprises  swell  with  a  dramatic  swiftness  while  rents 
and  wages  move  tardily  upward.  Then  again  for  years  profits 
fall  to  a  level  hardly  exceeding  a  low  interest  on  the  capital 
invested  or  leave  many  businesses  for  a  time  with  a  loss. 
Reasons  for  this  result  will  be  shown  more  in  detail  under 
cost  of  production. 

§  6.  Meanings  of  cost.  The  profit  in  enterprise  results 
from  the  surplus  of  sales  (receipts)  over  costs  (expenses). 
Few  words  are  more  often  heard  in  business  than  cost,  or 
with  more  varied  shades  of  meaning. 

In  a  general  sense  cost  always  means  something  given  up, 
parted  with,  paid,  to  get  something  else.  Often  this  outlay 
takes  the  form  of  pain,  fatigue,  or  irksomeness  of  labor,  tho 
this  is  a  psychic  cost,  better  termed  sacrifice.    Thus  it  is  said: 


350  ENTERPRISE  AND  PROFIT  [Pt.  V 

he  got  it  at  the  cost  of  tireless  effort;  it  cost  him  his  health. 
When  the  worker  who  is  free  to  determine  the  length  of  his 
working  day  stops  work,  he  reveals  that  his  valuation  of  his 
labor  just  at  that  point  is  greater  than  the  valuation  of  the 
product  that  will  come  from  further  labor — the  one  negative 
and  the  other  positive  in  the  balance.  Psychic  cost  thus  rises 
to  the  level  of  more  or  less  conscious  estimation  at  certain 
points  and,  like  psychic  income,  has  its  part  in  many  ways  in 
the  choices  made  by  individuals.  It  is  not,  however,  the  ob- 
jective measure  of  cost  in  the  transactions  of  trade. 

In  another  sense  cost  is  applied  to  any  objective  good  or 
any  gratification  which  could  have  been  chosen,  but  which 
was  given  up  when  another  choice  was  made.  This  is  alter- 
native cost,  called  by  some,  opportunity  cost.  It  is  an  option 
relinquished.  One  may  stay  at  home  and  read  a  book  or  go 
on  a  picnic;  the  pleasure  of  reading  a  book  will  cost  the 
pleasure  of  the  picnic.  A  good  dress  may  cost  a  vacation 
that  must  be  given  up  for  it.  In  this  sense,  each  thing  is  a 
cost  of  every  other  thing  that  might  be  chosen  in  the  place  of 
it,  tho  the  alternative  cost  thought  of  is  usually  the  most  im- 
portant excluded  option.  Alternative  cost,  like  psychic  cost, 
is  individual,  and  is  significant  at  the  moment  of  choice  but  is 
not  the  measure  in  which  business  outlay  is  expressed. 

The  sense  in  which  cost  is  mostly  used  in  business  in  the 
common  phrase  "cost  of  production"  is  money  cost.  It  ex- 
presses not  the  pain  of  the  laborer  in  doing  the  work,  not  the 
sacrifice  of  the  owner  of  the  capital  in  saving  the  money,  but 
merely  the  sum  of  money  paid  out  by  the  producer.  Costs, 
proceeds,  and  profits  are  all  in  business  practice  reckoned  in 
terms  of  money.  The  enterpriser  invests  in  order  to  realize 
profits.  Enterprise  is  investment,  the  putting  of  capital  into 
concrete  forms  of  wealth ;  and  it  is  in  turn  the  sale  of  wealth, 
a  process  which  might  be  called  divestment.  The  realization 
of  profit  means  getting  out  a  total  sum  of  capital  greater  than 
was  put  into  the  business.  Capital  is  thrown  into  the  melting 
pot,  and  is  taken  out  crystallized  into  new  forms  of  wealth 


Ch.28]  profits  and  COSTS  351 

which  may  or  may  not  bear  a  greater  price  than  the  costs. 
The  price  of  the  products  depends  on  the  valuations  of  pos- 
sible purchasers.  The  customers  may  be  foolish  men  with 
unwholesome  desires,  and  profit-making  may  result  from  pan- 
dering to  their  vices;  but  in  any  case  the  enterpriser  finds 
himself  limited  by  this  condition:  to  gain  a  profit  he  must 
produce  a  surplus  of  value  (as  judged  by  his  customers)  be- 
tween costs  and  selling  price.* 

§  7.  Superficial  view  of  costs  and  prices.  It  is  well  after 
this  discussion  of  costs  to  consider  their  relation  (as  a  more 
fundamental  problem  of  theory)  to  prices  and  values.  The 
business  man,  as  such,  is  rarely  interested  in  this  question. 
He  knows  that  many  influences  unite  to  determine  the  cost 
of  the  factors  he  buys,  but  they  are  distant;  he  cannot  influ- 
ence them,  and  in  the  single  stage  of  his  production  his  costs 
seem  to  fix  the  price  of  his  products.  In  some  purchases,  how- 
ever, and  on  the  stock  exchange,  a  remarkable  power  of  noting 
and  analyzing  the  more  distant  influences  is  displayed.  But 
in  general  a  superficial  view  of  value  is  taken  in  business ;  it 
does  not  pay  to  do  otherwise.  The  active  investor  simply 
takes  the  price  of  various  factors  as  he  finds  them,  and  seeks 
to  combine  them  and  to  sell  them  when  and  where  he  can 
reap  a  profit.  Yet  if  he  is  asked.  What  determines  the  prices 
of  goods?  he  probably  replies,  "They  are  fixed  by  cost-of- 
production. ' '  ^  This  is  the  way  it  appears  from  the  enter- 
priser's  point  of  view  as  he  is  deciding  whether  to  extend  or 
contract  his  production  and  sales,  whether  to  raise  or  lower 
his  prices. 

§  8.  Costs  adjusted  to  prices  of  products.  But  costs  vary 
from  one  establishment  to  another.    No  matter  what  any  par- 

4  Compare  note  on  value  vs.  utility  of  labor  in  ch.  19. 

B  Economists  long  took  that  proposition  as  sound,  and  tried  to  build 
upon  it  a  scientific  explanation  of  prices  and  values  as  they  are.  It 
always  has  been  recognized  that  there  are  difficulties  in  such  an  explana- 
tion. We  shall  not  enter  into  the  controversy,  but  briefly  indicate  the 
point  of  view  we  now  take. 


352  ENTERPRISE  AND  PROFIT  [Pt.  V 

ticular  enterpriser's  costs  may  be,  the  price  of  the  goods  is 
determined  by  the  bidding  of  buyers  and  sellers  in  the  mar- 
ket. If  any  one  is  so  situated  that  he  can  regularly  get 
more  than  cost  on  any  unit,  he  attributes  the  gain  to  what- 
ever agent  gives  the  advantage, — to  his  patents,  his  land,  his 
own  ability, — and  thereafter  he  adds  more  to  costs  on  that 
account.  In  this  case  we  see  plainly  that  the  value  (or  price) 
of  the  factors  (that  is,  the  cost)  is  being  marked  up  (or  down) 
according  to  the  price  of  the  products,  and  not  vice  versa. 

The  rule  must  be  reversed  also  in  the  ease  of  many  large 
classes  of  goods.  Some  things  that  can  not  be  multiplied  or 
reproduced,  such  as  autographs,  old  violins,  old  paintings, 
diamonds,  bring  prices  that  are  not  dependent  on  the  cost  of 
production.  The  same  is  true  of  great  numbers  of  natural 
resources,  including  all  lands  taken  in  a  state  of  nature, 
whether  agricultural,  mineral,  residential,  or  commercial. 
That  leaves  still  to  be  explained  the  relation  of  costs  to  the 
prices  of  the  great  class  of  goods  which  are  grown  by  the  art  of 
man,  e.g.,  grain,  cotton,  cattle,  etc.,  and  manufactured,  e.g., 
tools,  machines,  cloth,  etc.  Now  it  is  noticeable  that  every 
one  of  these  objects  has  a  cost  just  because  it  happens  to  be 
looked  at  just  when  it  is  in  the  enterpriser 's  hands  at  an  inter- 
mediate stage  of  its  production.  The  cost  rule  applies  only 
to  factors  that  have  been  bought  at  a  price,  and  the  total  cost 
is  simply  the  sum  of  the  prices  of  the  factors.  But  how  did 
the  factors,  the  various  qualities  of  labor,  the  materials,  use 
of  agents,  etc.,  get  their  price?  That  question  has  been  an- 
swered in  earlier  chapters:  from  the  value  of  the  expected 
product,  or  uses.  The  business  enterpriser  is  a  middle- 
man, buying  to  sell  again,  and  his  costs  determine  whether  or 
not  he  can  make  a  profit,  but  they  do  not  determine  the  prices 
of  the  products.  Rather  they  are  seen  to  be  determined  by 
the  prices,  when  a  broad  enough  view  of  the  situation  is  taken. 

§  9.  A  single  factor  of  a  single  product.  The  tracing  of 
the  value  of  goods  through  intermediate  products  to  direct 
enjoyable  goods,  and  finally  to  the  source  of  value  in  psychic 


Ch.  28] 


PROFITS  AND  COSTS 


353 


Fig 


A   Single   Factor  and 
Its  Peoducts.* 


income,  gives  the  genealogy  of  value.  After  the  goods  enter 
into  the  channels  of  commerce  and  are  once  bought  and  sold, 
they  bear  a  cost  to  the  owner.  In  the  one  direction  we  seek 
the  "ultimate  agent,"  or  factor,  the  natural  agents  and  la- 
borers; in  the  other  direction  we  seek  "the  ultimate  products" 
or  ultimate  uses.  A  single  product  having  a  single  factor 
shows  most  clearly  the  reflection  of  value  directly  from  the 
product.  (See  Figure  43.)  The  discovery  of  a  mineral 
spring  or  of  a  good  quality 
of  building-stone  on  worthless 
land,  will  cause  a  value  to  at- 
tach at  once  to  the  agent. 
When  a  great  singer  like  Ade- 
lina  Patti  commands  several 
thousand  dollars  for  each  ap- 
pearance in  concert,  the  value  of  the  music  in  the  minds  of  de- 
lighted hearers  is  transmitted  to  the  salary  of  the  singer.  Her 
salary  is  not  determined  by  cost,  but  it  becomes  a  cost  to  the 
enterpriser  who  employs  her  and  undertakes  a  concert  tour. 

§  10.  The  genealogy  of  value.  When  the  one  factor  yields 
several  different  kinds  of  products  no  one  product  alone  ac- 
counts for  the  value  of  the  factor.  As  any  one  wishing  the 
factor  for  any  use  must  bid  against  the  other  uses,  the  factor 
appears,  on  a  superficial  view,  to  have  a  price  already  deter- 
mined by  its  other  uses.  But  we  know  from  our  previous 
studies  (see  Chapters  4-6)  that  the  value  in  any  situation 
results  from  all  the  uses  taken  together,  including  the  par- 

*  A  factor  F  ( it  may  be  a  concert  singer,  an  acre  of  land,  or  a  mineral 
spring)  derives  its  entire  value  (usance  and  capital  value)  from  the 
price  of  the  product,  is  valuable  or  worthless  according  as  the  product 
is  so.  If  two  or  more  products  (p',  p",  p'")  are  attributable  to  it,  its 
value  is  the  sum  of  their  prices  (less  costs,  that  is,  the  prices  paid  for 
other  factors).  But  inasmuch  as  the  use  of  F  for  one  product  takes  it 
away  from  the  use  of  another,  the  value  of  its  use  must  be  accounted  as 
a  cost  whenever  it  is  a  question  of  increasing  the  output  of  any  one  of 
the  products.  Therefore,  at  that  moment  the  cost  seems  primary  and 
price  derived. 


364 


ENTERPRISE  AND  PROFIT 


[Pt.V 


ticular  use  we  began  to  examine.  To  take  a  simple  illustra- 
tion :  a  savage  finds  in  a  wreck  on  the  coast  a  number  of  bars 
of  iron.  He  and  his  fellow  tribesmen  wish  them  for  various 
purposes :  to  make  arrow  heads,  spears,  knives,  hatchets,  hoes, 
ornaments,  nails,  needles,  etc.  The  value  of  a  bar  used  to 
make  a  knife  is  in  this  case  derived,  in  part,  through  the  ulti- 
mate factor,  from  the  alternate  uses.  Taken  jointly  and  con- 
sidered as  one  sum,  the  values  of  the  products  account  as 
completely  and  exclusively  for  the  value  of  the  factor  as  if 


Factor 


Produc1-» 


Ul+ima+e 
_  _  _     Products 

Fio.    44.     Complex    Relations    of    Values    and 
Costs    Through    Intermediate    Products.* 

they  were  merged  into  one  product.  The  factor  (F)  is  dis- 
tributed to  each  of  the  products  in  accordance  with  the  mar- 
ginal principle  and  therefore  the  value  of  the  various  prod- 
ucts from  equal  quantities  of  any  factor  constantly  tends  to 

•  The  figure  shows  how  the  value  of  a  unit  of  product  at  a  is  reflected 
up  to  the  source,  and  through  successive  links  to  the  most  distant  prod- 
uct z.  The  effect  of  this  is  to  reduce  the  sale  of  z  and  correspondingly 
the  use  made  of  the  agent  in  question.  A  higher  price  of  leather, 
p",  due  to  the  increased  use  of  shoes  (f),  raises  the  value  of  hides 
and  cattle  (F)  and  raises  thus  the  cost  of  carriage-trimmings,  pocket- 
books,  footballs,  leather  belts,  and  every  other  leather  product  (b,  c,  d,  e). 
As  the  price  rises,  substitutes  for  leather,  and  imitations  of  it,  are 
used  for  such  of  the  products  as  can  not  bear  the  increased  cost  of 
leather.  As  more  cattle  are  raised  to  provide  the  leather,  the  value  of 
meat  (p'")  falls,  and  likewise  soap  (g)  and  oleomargarine  (z). 


Ch.28]  profits  and  COSTS  355 

equality.  Any  unit  of  product  sought  for  any  purpose  must 
be  paid  for  according  to  a  value  determined  by  the  costs  of 
the  factors  under  the  marginal  rule  in  all  the  applications. 
The  genesis  of  the  value  of  ultimate  factors  is  found  in  the 
value  of  the  product. 

In  actual  life  the  problem  is  far  more  complex,  and  yet, 
through  its  settlement  runs  just  the  same  principle.  There  is 
constant  bidding  for  factors,  and  through  their  prices  the 
claims  of  rival  products  are  adjusted.  A  point  is  reached 
where  it  does  not  pay  to  use  any  more  of  an  agent  in  a  certain 
industry ;  the  production  of  another  unit  results  in  a  loss  be- 
cause the  factors  are  worth  more  in  other  uses.  There  is  a 
most  complex  relation  among  many  different  industries  using 
the  same  factors.  Thus  in  countless  ways  the  values  of  prod- 
ucts of  widely  different  kinds  mutually  influence  each  other. 
The  value  of  no  one  is  an  isolated  fact,  but  is  ultimately  only 
the  reflection  of  its  relative  importance  in  meeting  the  desires 
of  men  in  view  of  the  whole  situation. 

§  11.  Money  cost  derived  from  price  of  products.  Prod- 
ucts compete  with  each  other  for  the  factors  that  enter  into 
them.  According  to  location,  quality  of  the  soil,  and  im- 
provements, a  certain  area  of  land  has  various  rival  uses. 
These  uses  bid  for  the  land ;  that  is,  put  in  an  economic  claim 
for  it.  Products  of  a  higher  value  outbid  and  exclude  those 
of  a  lower.  If  fine  wine  can  be  raised  on  a  piece  of  land, 
potatoes  ordinarily  will  not  be  planted  in  it.  But  if  there 
is  such  a  supply  of  that  quality  of  land  that  it  continues  to  be 
used  side  by  side  for  both  products,  it  will  have  the  same 
value  and  yield  the  same  rental  in  both  uses.  The  law  of 
indifference  applies.  The  demand  for  any  factor  entering 
into  products  is  reflected,  in  an  increased  price,  to  its  cost 
in  all  competing  products.  Machines  are  usually  made  for 
some  product  determined  in  advance,  but  often  they  are  only 
partially  specialized  and  within  limits  they  can  be  adapted. 
Sewing-machine  factories  were  readily  turned  to  the  making 
of  bicycles  at  the  time  of  greatest  demand,  and  bicycle  fac- 


366  ENTERPRISE  AND  PROFIT  [Pt.  V 

tories  later  were  used  for  the  making  of  automobiles.  Thus, 
in  general,  machinery  is  used  for  the  product  in  which  it  can 
realize  its  highest  value.  Any  enterprise  seeking  it  for  any 
other  use  finds  its  "cost"  affected  by  its  various  alternative 
uses.  The  same  is  true  of  all  the  materials  and  of  all  the 
grades  of  labor  entering  into  products.  The  enterpriser's 
cost  is  therefore  the  reflection  of  the  ultimate  prices  of  the 
productive  agents  in  all  its  other  uses  as  well  as  in  the  par- 
ticular product  he  desires. 

§12.  Cost  an  expression  of  consumers'  estimates.  We 
thus  conclude  that  even  where  cost  appears  to  be  the  limit- 
ing influence  in  the  price  of  a  particular  product,  the  cost 
is  itself  fixed  by  a  larger  group  of  influences,  the  demand 
for  the  factor  in  the  totality  of  its  uses.  Wherever  cost 
asserts  itself  the  enterpriser  must  bow  to  the  situation,  and 
must  conform  closely  to  costs  or  suffer  a  loss.  The  consumer 
by  deciding  to  buy  this  or  that  product  sets  into  motion  waves 
of  value.  The  enterpriser  transmits  these  to  the  factors. 
He  is  the  medium  through  which  consumers  express  their  esti- 
mates. The  enterpriser  who  anticipates  aright  and  satisfies 
the  public  taste  is  the  good  medium.  He  readily  transmits 
and  accurately  focuses  the  rays  of  public  judgment.  The 
enterpriser  who  misjudges  is  a  poor  medium.  The  one  real- 
izes profits,  the  other  incurs  a  loss. 

Notes 
On  other  meanings  of  profit.  It  is  well  to  note  for  caution's  sake 
other  loose  uses  of  profit  as  any  gain  or  advantage  secured  by  any  means 
in  business.  In  retail  business  it  has  the  meaning  of  the  gross  gain  on 
a  given  sale,  the  excess  of  the  selling  price  over  the  price  at  wliich  the 
merchant  bought  it  from  manufacturer  or  wholesaler.  Let  us  call  this 
aale-profit.  Buying  an  article  for  one  dollar  and  selling  it  for  two 
dollars,  is  said  by  the  merchant  to  be  selling  at  100  per  cent  profit, 
jocularly  called,  "The  Dutchman's  one  per  cent."  In  different  lines  of 
goods  there  is  added  regularly  to  this  cost  20,  30,  or  50  per  cent,  as 
the  case  may  be,  as  the  merchant's  profit  on  the  sale.  Sale-profit  leaves 
out  of  account  rent,  interest  on  capital,  clerk  hire,  freight,  and  many 
other  minor  items  that  enter  into  the  cost  of  running  a  store.  It  often 
happens  that  the  Dutchman's  way  of  reckoning  is  near  the  truth,  and 


Ch.  28]  PROFITS  AND  COSTS  357 

that  the  sale-profit  of  100  per  cent  leaves  at  the  end  of  the  year  hardly 
1  per  cent  of  the  sales  as  a  true  income  to  the  merchant.  This  meaning 
is  sometimes  developed  to  a  yearly  sales-profit,  the  sum  of  all  the  sepa- 
rate sale-profits  within  a  year,  or  the  difference  between  the  wholesale  and 
retail  prices  of  goods  sold  within  the  year. 

Another  meaning  is  given  to  the  term  by  expressing  yearly  sales-profits 
as  a  percentage  of  the  capital  invested.  The  rate  of  profit  in  this  case 
varies  partly  with  the  rate  of  the  turnover.  To  illustrate :  if  the  amount 
invested  in  a  printing-office  is  $100,000,  and  the  annual  business  done  is 
$300,000,  the  capital  is  said  to  be  turned  over  three  times;  if  the  yearly 
sales-profit  were  20  per  cent,  the  ratio  of  sales-profit  to  investment  would 
be  60  per  cent;  but,  if  the  capital  had  been  turned  over  four  times,  the 
rate  would  have  been  80  per  cent  on  the  investment.  In  none  of  these 
cases  is  profit  used  truly  as  an  income. 

The  source  and  cause  of  profits  in  economic  writings.  Profits, 
as  used  by  the  English  economists  from  Adam  Smith  ("Wealth  of  Na- 
tions," 1776)  to  John  Stuart  Mill  ("Principles  of  Political  Economy," 
1848)  and  after,  was  the  residual  amount  combining  the  incomes  attribu- 
table to  the  personal  management  together  with  the  capital-investment. 
These  functions  were  assumed  without  discussion  to  be  imited  in  one  per- 
son, as  they  usually  were,  stock  companies  at  that  time  being  rare  outside 
of  banking  and  foreign  trading  companies.  The  capital-income  was  as- 
sumed to  be  much  the  larger  part  and  there  was  almost  no  thought  of 
the  varying  degrees  of  ability  in  management  as  affecting  the  result. 
Hence  profits  in  the  older  English  economics  often  means  nearly  the 
same  as  yield  from  capital,  peculiarly  the  income  of  the  capitalist; 
tho  usually  it  means  this  plus  an  allowance  for  risk  and  services  of 
management.  "Normal"  profit  was  thought  of  as  varying  from  one 
class  of  business  to  another  but  not  very  clearly  as  varying  from  one 
establishment  to  another. 

Then  the  pendulum  swung  in  the  other  direction  and  some  writers, 
notably  the  American,  Francis  A.  Walker,  made  profit  mean  almost 
solely  the  earnings  of  management,  it  being  assimied  that  financial  re- 
sources naturally  rolled  into  the  possession  of  able  business  managers. 
But,  as  it  was  assumed  that  they  always  had  some  capital  themselves, 
the  concept  of  profit  still  had  a  dual  character.  Capitalists  were 
thought  of  as  always  getting  a  contractual  income,  interest,  whereas 
the  entrepreneur  got  an  income  varying  from  zero  (or  a  minus  quantity) 
upwards,  according  to  his  skill  in  management. 


CHAPTER  29 
VARIOUS  SHADES  OF  PROFITS 

§  1.  Review  of  the  profit-concept.  §  2.  Skill  in  relation  to  risk.  §  3. 
Union  of  chance  and  choice.  §  4.  Element  of  pure  chance.  §  5.  Changes 
in  transportation  and  in  land-values.  §  6.  The  so-called  unearned  incre- 
ment. §  7.  Element  of  speculation  in  business.  §  8.  Specialization  of 
risk-taking,  in  produce  markets.  §  9.  Produce  speculators  as  insurers. 
§  10.  Ignorant  and  dishonest  speculation.  §  11.  Fraudulent  and  illicit 
profits. 

§  1.  Review  of  the  profit-concept.  Profit  is  the  legal 
residual  share  of  the  total  income  yielded  by  an  enterprise, 
the  share  (positive  or  negative,  profit  or  loss)  that  is  left  to 
the  owners  of  the  enterprise.  Every  enterprise,  however  sim- 
ple, involves  ownership  of  agents  and  product,  and  between 
the  investing  and  the  accounting  at  the  end  of  any  period, 
there  is  financial  responsibility  and  profit  or  loss.  This  may 
be  minimized  by  one  owner  by  contract  with  another,  the  one 
thus  becoming  more  passive  and  safe,  tho  still  having  some 
risk,  and  the  other,  taking  at  a  price  the  active  control  of 
wealth  and  services  and  selling  the  results  for  whatever  he 
can  get.  The  laborer  still  runs  the  risk  of  becoming  inca- 
pacitated by  illness  or  accident,  or  of  being  thrown  out  of 
employment.  The  lender  still  has  some  risk  of  failure  of  the 
debtor,  etc.  But  the  laborer  sells  his  labor,  and  the  capitalist 
sells  the  use  of  his  wealth — horses,  lands,  equipment,  and  of 
his  loanable  capital,  and  accepts  a  definite  income  and  the 
legal  responsibility  of  the  borrower  to  repay  the  loan. 

§  2.  Skill  in  relation  to  risk.  In  most  enterprises  and 
under  normal  conditions  of  business  the  largest  factor  in  de- 
termining whether  there  will  be  anything  left  for  profits  is 

358 


Ch.  29]  VARIOUS  SHADES  OF  PROFITS  359 

the  skill  with  which  the  business  is  planned  and  managed, 
from  the  first  investment  to  the  last  little  detail  by  the  well- 
chosen  agents  of  the  enterprisers.  There  are  many  chances 
and  risks,  but  few  of  them  are  completely  objective,  of  a 
kind  utterly  beyond  the  control  of  the  enterpriser.  Even 
loss  by  lightning,  flood,  fire,  and  other  "acts  of  God"  (in 
legal  phrase)  are  more  or  less  liable  according  to  the  judg- 
ment and  foresight  in  the  construction  and  location  of  build- 
ings, care  in  their  oversight,  etc.  This  power  to  minimize 
risk,  the  restless  watchfulness  and  the  intuitive  anticipation 
of  dangers,  and  often  the  discovery  of  ways  to  convert  them 
into  advantages,  is  a  large  part  of  what  is  meant  by  skill  of 
management.  The  risk  of  business  is  not  that  of  the  throw- 
ing of  dice  in  which  (if  it  is  fair)  skill  plays  no  part,  and 
gains  in  the  long  run  offset  losses.  Business  risk  is  rather  that 
of  the  rope-walker  in  crossing  Niagara;  the  task  is  easily 
undertaken  by  the  skilful  Blondin,  it  is  fatally  dangerous  to 
the  man  of  unsteady  nerve  and  limb.  The  skilled  workman, 
handling,  with  sure  touch,  the  delicate  and  costly  materials, 
can  not  be  said  to  be  incurring  a  great  risk  of  spoiling  his 
work,  however  great  the  risk  to  the  novice  or  the  bungler. 

Looking  at  this  large  phase  of  the  problem,  profits  are  seen 
to  be  due  not  to  the  existence  of  risks,  but  to  comparative 
skill  in  taking  risks  which  in  many  cases  is  the  ability  to  make 
the  risk  dwindle  or  disappear.  Some  men  are  more  able  to 
perform  the  function  of  enterprise  than  others,  and  profits 
are  high  or  low  just  as  fruits  are  bountiful  on  fertile  soil  and 
scanty  on  barren  soil.  In  this  aspect  profits  in  the  long  run 
are  the  share  (non-contractual)  of  skill  and  ability  in  the 
function  of  enterprise;  and  our  illustrations  above  have 
largely  been  drawn  from  industries  in  which  this  seems  to  be 
the  true  view. 

§  3.  Union  of  chance  and  choice.  But  there  is  another 
aspect  of  the  subject.  Profits,  just  because  it  is  the  actual  re- 
sidual, is  the  most  complex  and  varying  share.  The  enter- 
priser, to  the  extent  of  his  credit  and  financial  strength. 


360  ENTERPRISE  AND  PROFIT  [Pt.  V 

undertakes  to  assume  the  risks  for  all  the  other  factors. 
Profits  is  the  catch-all  for  every  unforeseen  or  variable  change 
of  price  between  each  act  of  investment  and  the  ultimate  sale 
of  the  goods.  Chance  therefore  has  its  part;  but  the  tempta- 
tion is  to  exaggerate  its  importance.  IMany  cases  of  profit 
said  to  be  due  to  chance  are  found  on  closer  knowledge  to  be 
due  to  superior  judgment.  They  result  from  a  union  of 
happy  chance  with  deliberate  choice.  The  adventurer  who, 
on  the  discovery  of  gold,  goes  at  once  to  California  or  to 
Alaska,  may  stumble  upon  a  gold-mine.  It  is  luck;  but  he 
has  gone  to  a  place  where  gold-mines  are  comparatively 
plentiful.  If  he  stays  at  home  it  is  more  likely  that  he  will 
stumble  over  an  ash-heap.  Throughout  life  there  is  constant 
opportunity,  but  it  must  be  sought.  One  who  has  the  good 
judgment  to  be  ever  at  the  right  time  at  the  place  where  he 
has  the  best  chance  of  finding  a  good  thing,  usually  gets  the 
advantage,  and  men  call  it  luck.  The  more  the  causes  of  suc- 
cess in  general  are  studied,  the  larger  is  found  the  element  of 
choice,  the  smaller  that  of  luck. 

§  4.  Element  of  pure  chance.  But  after  all  these  quali- 
fications, cases  remain  in  which  profits  can  only  be  said  to  be 
the  result  of  pure  chance  or  luck.  It  still  sometimes  appears 
better  to  be  born  lucky  than  to  be  bom  rich.  What  is  luck? 
A  result  that  is  not  calculable,  coming  to  pass  in  conditions 
where  a  rational  choice  is  not  possible,  is  called  luck,  for  lack 
of  another  name.  There  is  bad  luck  as  well  as  good  luck. 
According  to  the  law  of  chance,  in  the  tossing  of  a  coin  for 
"heads  or  tails,"  one  side  is  as  likely  to  come  up  as  the 
other,  and  in  the  long  run  the  number  of  heads  and  tails  will 
be  equal.  Taking  all  together  the  pure  accidents  of  certain 
kinds,  in  the  community,  they  are  so  numerous  that  losses  and 
gains  distribute  themselves  about  a  general  average  by  what 
is  called  the  law  of  averages,  or  the  law  of  large  numbers. 
The  individual's  risk  then  may  be  eliminated  by  insurance, 
as  that  against  fire,  flood,  lightning,  against  sickness  of  the 
employer,  which  would  cripple  the  business,  or  against  his 


Ch.29]  various  shades  OF  PROFITS  361 

death,  which  would  cheek  it.  But  many  factors  evade  all 
attempts  to  reduce  them  to  rule  and  there  is  no  possibility  of 
insuring  against  them:  war,  changes  in  markets,  good  and 
bad  harvests,  financial  crises,  etc.  One  year  the  enterprise 
gains,  another  it  loses.  One  man  makes  a  success  because  he 
happened  to  engage  in  business  at  that  time,  another  man 
fails  because  he  happened  to  undertake  it  at  another  time, 
with  no  more  real  judgment  in  the  one  case  than  in  the  other. 

§  5.  Changes  in  transportation  and  in  land-values.  The 
union  of  choice  and  chance  in  varying  proportions  is  seen  in 
many  instances  of  the  increase  in  the  value  of  land.  The 
rapid  changes  in  transportation  since  the  beginning  of  the 
nineteenth  century  have  wrought  great  changes  in  the  value 
of  lands  for  many  purposes,  and  thus  have  brought  great 
chance  profits  (and  often  great  losses)  to  individuals.  To 
take  a  few  examples. 

The  Erie  Canal,  completed  in  1825,  increased  the  trade  of 
the  ports  of  New  York  and  Buffalo,  brought  prosperity  to 
many  cities  on  its  waters,  increased  the  value  of  agricultural 
lands  on  and  near  the  Great  Lakes,  but  reduced  the  value  of 
many  farms  in  New  York  and  New  England.  The  completion 
of  the  Boston  and  Albany  railroad  in  1841  and  the  later  open- 
ing of  the  Hoosae  tunnel  probably  helped  the  mechanical  and 
depressed  the  agricultural  industries  of  New  England.  The 
spread  of  the  railroads  in  the  United  States  from  1850  to 
1880  went  on  with  unparalleled  rapidity,  and  opened  up  to 
settlement  great  areas  of  rich  lands  which  rose  in  value.  At 
the  same  time  the  large  new  supplies  of  agricultural  produce 
so  reduced  prices  in  the  great  markets,  and  the  incomes  from 
lands  in  eastern  America  and  in  western  Europe  fell  so 
greatly  that  many  farmers  were  bankrupted.  Timber  lands 
bought  from  the  government  at  fifty  cents  an  acre  made  enor- 
mous fortunes  for  the  so-called  "lumber  kings"  of  the  North- 
west. The  Panama  Canal  raised  the  efficiency  of  ships  plying 
between  New  York  and  San  Francisco,  enabling  them  to  carry 
freight  more  quickly  and  in  greater  amounts.     The  railroads 


362  ENTERPRISE  AND  PROFIT  [Pt.  V 

must  lower  some  freight  rates  and  even  then  lose  a  part  of 
their  traffic,  and  many  of  the  lands  on  the  Pacific  coast  must 
rise  in  value. 

Changes  in  transportation  alter  the  location  and  character 
of  all  kinds  of  enterprises.  After  the  building  of  the  rail- 
roads in  Pennsylvania  new  forges  were  built  where  deposits 
were  richer  or  where  materials  and  products  could  be  more 
cheaply  shipped,  and  many  prosperous  small  forges  on  the 
country  roads  became  valueless.  A  similar  change  has  relo- 
cated the  flour  milling,  the  mechanical,  and  the  textile  indus- 
tries of  a  large  part  of  the  country.  As  population  has  been 
growing  rapidly  in  Christendom  in  the  past  century  or  more, 
farms  have  become  villages,  villages  have  become  cities,  low- 
priced  residential  lots  have  become  expensive  business  sites. 

§  6.  The  so-called  unearned  increment.  Such  changes 
and  chances  as  these  have  resulted  in  profits  and  losses  to 
great  numbers  of  landowners,  who  as  investors  have  seen  their 
lands  rise  above  or  fall  below  the  price  for  which  they  bought 
the  land.  The  name  "unearned  increment"  has  frequently 
been  applied  especially  to  this  kind  of  profit  of  the  land- 
owner. It  is  true  that  in  many  ways  the  ownership  of  a 
piece  of  land  may  give  unexpected  gains.  Farm  land  of  the 
poorest  kind  often  is  found  to  contain  valuable  mineral  de- 
posits. Such  a  lucky  find  lifted  the  mortgage  from  a  farm  in 
eastern  Pennsylvania,  from  which,  in  two  or  three  years,  feld- 
spar was  taken  exceeding  in  value  the  agricultural  products 
of  the  same  land  in  the  fifty  years  before.  The  discovery  of 
building  stone,  coal,  natural  gas,  or  oil  beneath  the  surface 
has  brought  riches  to  many  a  poor  landowner.  A  mineral 
spring,  because  of  the  supposed  or  proved  healing  properties 
of  its  waters,  may  be  as  good  as  a  mine.  Fitness  to  produce 
nettles  is  not  ordinarily  a  virtue  in  land,  but  the  discovery 
that  certain  fields  produce  a  superior  quality  of  the  nettle 
used  for  heckling  cloth,  causes  them  to  rise  in  price.  Marsh 
land,  almost  valueless,  found  to  be  peculiarly  fitted  for  the 
cultivation  of  celery,  becomes  very  valuable.    While  the  in- 


Ch.  29]  VARIOUS  SHADES  OF  PROFITS  363 

come  of  the  owners  of  these  lands  is  increased,  that  of  other 
owners  may  be  diminished,  as  a  result  of  the  fall  of  prices 
and  the  shift  of  demand. 

The  increment  of  land  values  seems  especially  unearned 
when  it  arises  as  an  incident  to  the  holding  of  the  land  for 
other  purposes,  as  for  farming,  or  for  one's  own  residence. 
The  striking  fact  in  the  extreme  cases  of  chance  increments 
of  land  values  is  that  profits  accrue  to  quite  unenterprising 
landowners.  Many  dramatic  changes  of  fortune  have  re- 
sulted and  in  many  a  case  some  half-miserly  old  farmer  doing 
nothing  to  improve  the  community  and  opposing  all  change, 
has  left  a  fabulous  fortune  to  his  heirs.  And  yet,  compara- 
tively speaking,  such  cases  are  about  as  rare  among  land- 
owners as  are  capital  prizes  in  a  lottery,  and  there  are  many 
cases  of  profit  in  things  other  than  lands,  where  there  is  a 
similar  profit  due  to  chance.  Stocks  of  goods  are  worth  more 
or  less,  horses,  cattle,  grain,  go  up  and  down  in  price  in  the 
hands  of  farmers  or  of  produce  merchants.  All  profit  in- 
volves this  element.  Land  profit  is  but  one  notable  example 
of  a  general  fact. 

Moreover,  while  the  change  of  land  values  is  on  the  whole 
upwards  where  population  is  increasing,  many  pieces  of  land 
fall  in  price ;  there  are  undeserved  decrements  as  well  as  un- 
earned increments.  So  far  as  increases  in  land  value  can  be 
foreseen  they  are  included  in  the  present  worth  of  the  land, 
and  the  new  purchaser  does  not  thereafter,  viewed  as  an  in- 
vestor, get  any  "unearned"  increment  except  from  unfore- 
seen or  miscalculated  changes. 

As  a  matter  of  the  theory  of  profits  there  is  nothing  pecul- 
iar in  the  "unearned"  increment  of  land.  A  question  calling 
for  separate  consideration  is  whether  it  is  expedient  to  adopt 
a  different  policy  as  to  property  in  land,  by  special  land- 
taxation,  or  by  appropriating  the  profit  (increment)  which 
now  goes  to  the  owners  in  advancing  neighborhoods,  or  by 
any  other  limitations. 

§7.    Element  of  speculation  in  business.    A  still  further 


364 


ENTERPRISE  AND  PROFIT 


[Pt.V 


specialization  of  risk-taking  is  effected  by  means  of  insurance 
and  of  certain  forms  of  speculation.  In  its  broadest  sense 
speculation  means  looking  into  things,  examining  attentively, 
studying  deeply.  In  a  business  sense  the  speculator  is  one 
who  studies  carefully  the  conditions  and  the  chances  of  a 


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Fia.  45.     Business  Failures  in  the  U.  S.,  1890-1914.* 

•  The  statistics  cover  only  the  kinds  of  enterprises  that  are  reported 
upon  by  the  large  commercial  agencies  and  therefore  do  not  include 
farming  and  numerous  petty  enterprises.  The  total  number  of  business 
concerns  reported  was  about  one  sixtieth  of  the  population.  The  general 
yearly  average  of  failures  was  about  1  in  100  business  concerns.  If  en- 
terprisers are  in  business  on  the  average  33  years,  the  chance  of  any  one 
of  them  failing  sometime  in  his  career  is  1  in  3.  The  increase  of  fail- 
ures in  or  just  after  a  year  of  financial  trouble  appears  in  1893,  1907-08, 
and  1914,  but  the  stock-exchange  panic  of  1903  showed  no  effects.  The 
rate  continued  high  In  the  long  financial  depression  of  1893-98,  was  low 
in  the  generally  prosperous  years  1899-1906,  and  rose  steadily  from 
1911  to  1914. 

change  of  prices ;  hence  arises  the  thought  that  speculation  is 
connected  with  chance.  The  enterpriser  should  be  able  to 
estimate  these  chances  better  than  most  men.  Every  enter- 
priser is  to  some  extent  specializing  as  a  risk-taker.    He  re- 


Ch.  29]  VARIOUS  SHADES  OF  PROFITS  365 

lieves  the  other  agents  of  part  of  the  risk,  and  he  insures  hoth 
laborer  and  capitalist  against  future  fluctuations  of  prices. 
Some  of  the  profits  of  successful  enterprise  are  speculative 
gains  of  this  sort.  Offsetting  them,  however,  in  large  meas- 
ure, are  the  speculative  losses,  by  which  in  many  cases  the 
investment  is  swept  away  altogether.  The  cautious  business 
man  tries  to  reduce  chance  as  much  as  possible  by  insurance, 
where  a  regular  system  prevails,  and  to  confine  his  thought 
and  worry  to  the  parts  of  the  productive  process  where  his 
ability  counts  in  the  result.  A  man  can  better  concentrate  his 
thought  and  effort  upon  running  a  flour  mill,  if  some  one 
else  will,  for  a  price,  take  the  risks  of  fire,  of  loss  in  shipment, 
and  of  a  rise  in  the  price  of  grain  needed  to  fill  outstanding 
orders.  Insurance  being  the  economical  way  to  cover  risk, 
the  reckless  will,  in  the  long  run,  more  likely  be  eliminated 
from  the  ranks  of  enterprisers.^ 

§  8.  Specialization  of  risk-taking  in  produce  markets. 
In  some  lines  the  risk  of  marketing  and  carrying  large  stocks 
becomes  highly  specialized,  so  that  ordinary  enterprisers  shift 
it  to  a  small  group  of  risk-takers.  In  buying  and  selling  large 
quantities  of  produce  there  is  required  the  closest  and  most 
exclusive  attention  of  a  small  group  of  men.  The  marketing 
of  some  staple  products  requires  the  most  minute  acquaintance 
with  world  conditions.  To  foretell  the  price  of  wheat  one 
must  know  the  rainfall  in  India,  the  condition  of  the  crop  in 
Argentina,  must  be  in  touch  as  nearly  as  possible  with  every 
unit  of  supply  that  will  come  into  the  world  market.  Such 
knowledge  is  sought  by  the  great  produce  speculators  in  the 
central  markets.  If  all  means  of  communication — telegraph, 
cables,  mails — are  open  to  all,  competition  among  these  spec- 
ulators becomes  intense,  and  the  result  is  great  efficiency. 
Their  survival  depends  on  the  development  of  acute  insight 
into  market  conditions.  The  margin  at  which  farm  produce 
is  sold  in  the  great  wholesale  markets  is  a  very  narrow  one. 
These  products  are  marketed  along  the  lines  of  the  least  re- 

1  Insurance  will  be  treated  in  the  following  volume. 


366  ENTERPRISE  AND  PROFIT  [Pt.  V 

sistance;  that  is,  of  the  greatest  economy.  The  function  of 
the  commercial  specialists  is  to  foresee  the  markets,  and  to 
ship  to  the  best  place,  at  the  right  time,  in  the  right  quan- 
tities. If  a  product  shipped  to  Liverpool  will,  by  the  time  it 
arrives  there,  be  worth  more  in  Hamburg,  there  is  a  loss. 
Such  difficult  decisions  can  be  made  best  by  a  small  group 
of  men  selected  by  competition.  When  handling  actual  prod- 
ucts they  perform  a  real  economic  service. 

§  9,  Produce  speculators  as  insurers.  Many  of  the  specu- 
lators in  staples,  wheat,  corn,  wool,  rarely  handle  the  material 
things,  the  real  products.  They  make  it  their  business  to 
study  the  world  conditions  and  to  buy  or  sell  for  future  de- 
livery. Regular  merchants  buy  and  sell  "futures"  from  or 
to  these  men;  that  is,  they  promise  to  deliver  or  take  the 
produce  or  pay  the  difference  between  the  contract  and  the 
actual  price  at  the  time  of  maturity.  Mere  speculators  on 
the  produce  markets  may  and  do  at  times  thus  perform  service 
as  risk  takers.  When  a  miller  buys  ten  thousand  bushels  of 
wheat  that  will  remain  in  the  mill  three  months  before  they 
are  marketed  as  actual  flour,  he  "hedges";  that  is,  he  at  the 
same  time  sells  that  number  of  bushels  to  a  speculator  for 
future  delivery.  If  wheat  goes  down  in  price  the  loss  on  the 
actual  wheat  is  balanced  by  the  gain  on  the  "future,"  and 
vice  versa.  Or  selling  flour  for  future  delivery  the  miller 
buys  a  future  in  wheat;  if  wheat  goes  up  in  price,  the  mil- 
ler's loss  on  his  contract  for  flour  is  offset  by  the  gain  on  the 
"future."  In  either  case  he  cancels  the  chance  of  loss  or 
gain,  giving  up  the  chance  of  profit  in  the  rise  of  wheat  in 
exchange  for  protection  from  the  loss  of  the  product  on  his 
hands.  To  him  this  is  legitimate  insurance,  for  he  is  striving 
not  to  create  an  artificial  risk,  but  to  neutralize  one  that  is  in- 
separable from  the  ordinary  conditions  of  his  business. 

How  can  the  speculator  profit  if  the  miller  in  the  long  run 
benefits?  There  are  unsuccessful  speculators  and  at  any  rate 
their  losses  go  to  the  successful  as  a  sort  of  gambling  profit. 
But,  further,  the  sales  to  legitimate  purchasers  should  net  a 


Ch.  29]  VARIOUS  SHADES  OF  PROFITS  367 

gain  to  the  abler  speculator.  In  proportion  as  his  estimates 
are  correct,  there  will  remain  a  regular  slight  margin  of  profit 
to  him.  If  he  sells  wheat  at  eighty-five  cents  to  be  delivered 
in  three  months,  he  expects  it  to  be  a  little  less  at  that  time ; 
if  he  buys  a  future  he  expects  the  price  to  be  a  little  more  at 
that  time.  In  the  long  run  the  speculator  to  be  successful 
must  buy  at  a  little  less  and  sell  at  a  little  more  than  the  price 
really  proves  to  be.  This  means  that  the  merchants  in  the 
long  run  pay  something  for  protection  against  changes  in 
prices,  just  as  they  pay  something  for  insurance.  And  yet 
this  is  the  cheapest  way  to  reduce  risk,  and  a  man  engaged  in 
milling  is,  it  is  said,  at  a  disadvantage  if  he  neglects  this 
method  of  insurance. 

§  10.  Ignorant  and  dishonest  speculation.  What  has  just 
been  described  is  the  more  legitimate  phase  of  buying  on  mar- 
gin, not  its  darker  aspect.  One  who,  having  no  special  op- 
portunities to  know  the  market,  buys  or  sells  wheat,  or  other 
commodities  or  securities,  on  margin,  is  called  a  "lamb."  He 
is  simply  betting.  He  has  no  unusual  skill;  he  can  not  fore- 
see the  result.  The  commission  paid  to  brokers  "loads  the 
dice ' '  slightly ;  the  opportunities  of  the  larger  dealer  of  antici- 
pating information  load  the  dice  heavily  against  the  "lambs." 
Secret  combinations  and  all  kinds  of  false  rumors  cause  fluc- 
tuations large  enough  to  use  up  the  margins  of  the  small 
speculator.  At  times  a  number  of  powerful  dealers  unite  to 
cause  an  artificially  high  or  low  price,  a  situation  called  "a 
corner, ' '  in  which  both  other  professional  speculators  and  the 
outsiders  are  made  to  pay  heavily.  But  this  is  little  other 
than  gambling  between  bettors. 

§  11.  Fraudulent  and  illicit  profits.  Interwoven  with 
profits  in  many  cases  is  a  dark  thread  of  fraud.  Caveat 
emptor  is  by  law  the  rule  of  the  market,  and  the  salesman 
often  uses  the  subtle  arts  of  misrepresentation.  Undoubtedly 
honesty  is  the  best  policy,  but  it  is  not  always  the  most  profit- 
able policy  in  a  pecuniary  sense.  Cheating,  lying,  breaking 
of  contracts,  bribery  of  public  officials,  and  many  similar  acts 


368  ENTERPRISE  AND  PROFIT  [Pt.  V 

may  increase  individual  incomes.  One  man  gains  a  tempo- 
rary success  by  acts  that  are  later  punished  as  crimes;  an- 
other, guilty  of  like  deeds,  escapes  conviction  for  lack  of  evi- 
dence or  on  technicalities,  and  enjoys  ill-gotten  wealth.  More 
fortunes,  however,  are  due  to  actions  on  the  border-line  of 
law  which  society  is  not  yet  wise  enough  to  condemn  or  effi- 
cient enough  to  prevent.  No  code  of  laws  can  be  framed  that 
will  make  possible  the  punishment  of  all  evil  acts  in  trade. 
Any  law  that  would  catch  all  the  guilty  would  injure  many 
of  the  innocent.  The  efforts  of  social  reformers  are  being 
directed  toward  detecting  and  preventing  the  fraud,  intimi- 
dation, and  extortion  that  still  make  up  no  inconsiderable 
part  of  private  profits.  It  may  be  noted  that  under  the  Eng- 
lish common  law,  for  centuries  past,  monopoly  has  been 
tainted  with  illegality,  so  that  all  monopoly  profits  that  are 
not  legally  protected  (such  as  incomes  from  patents,  copy- 
rights, fairly  obtained  franchises,  etc.)  must  be  classed  under 
this  heading. 


CHAPTER  30 
COSTS  AND  COJVIPETITIVE  PRICES 

§  1.  Competitive  prices  and  unequal  costs  of  competition.  §  2.  Selling 
and  cost-finding.  §  3.  Examples  of  joint  costs.  §  4.  Main  classes  of 
costs.  §  5.  The  problem  of  cost  accounting.  §  6.  Homogeneous  products 
with  imequal  costs.  §  7.  Principle  of  charging  what  the  traffic  will  bear. 
§  8.  How  prices  are  limited  under  competition.  §  9.  Borderland  of 
monopoly.  §  10.  Difficulty  of  departing  from  average  costs  in  compe- 
tition. 

§  1.  Competitive  prices  and  unequal  costs  of  competi- 
tion. The  product  of  a  business  must  be  sold,  and  for  this 
some  special  selling  management  and  selling  organization  is 
required.  In  a  mercantile  business  selling  is  the  largest  part 
of  the  activity,  and  to  this  end  well-located  stores,  window  dis- 
plays, clerks,  agents,  expensive  advertising,  and  delivery 
wagons  are  needed.  The  prime  cost  of  the  articles  at  whole- 
sale, plus  certain  minor  expenses,  plus  the  selling  cost,  make 
up  the  whole  cost  of  doing  business.  In  all  other  kinds  of 
business  whether  agricultural,  manufacturing,  transportation, 
etc.,  selling  is  an  important  task,  which  must  be  well  done  if 
all  the  other  labors  of  management  are  not  to  be  in  vain. 
The  products  of  a  factory  will  not  sell  themselves,  and  the 
obtaining  of  a  regular  series  of  orders  sufficient  to  use  the 
equipment  fully  is  one  of  the  most  essential  conditions  of  a 
low  unit  cost  of  production. 

The  selling  price  must  as  a  whole  equal  cost  or  there  will 
be  a  loss.  New  factories  are  constantly  arising  with  new  and 
better  adjustments  and  the  processes  are  always  changing. 
No  two  enterprises  have  exactly  equal  advantages  of  location 
for  materials  or  markets,  etc.,  or  are  managed  with  exactly 

369 


370  ENTERPRISE  AND  PROFIT  [Px.V 

equal  ability.  Hence  there  is  always  a  pressure  of  competi- 
tion on  some  managers  who  constantly  complain  that  they 
must  sell  below  the  cost  of  production.  Business  men  say 
that  competition  is  destructive,  and  it  certainly  does  destroy 
the  less  favorably  situated  enterprises.  Each  enterpriser's 
price  is  the  highest  he  can  get  in  the  market  for  his  product ; 
it  may  far  exceed  his  costs;  it  may  fall  below  them,  but  only 
temporarily,  for  if  sales  continue  to  encroach  on  capital,  the 
sheriff  soon  closes  the  doors.  Successful  competitors  are  con- 
stantly pressing  upon  the  marginal  enterpriser,  fixing  a  price 
that  leaves  themselves  a  profit,  but  is  below  his  cost.  Even 
the  most  successful  manager  comes  into  contact  with  cost,  and 
seems  to  be  compelled  by  it.  He  reaches  out  for  trade,  and 
sells  some  (not  all)  goods  at  a  price  which  leaves  him  little 
if  any  profit.  He  enlarges  his  factory  and  ships  goods  farther, 
paying  the  freight,  which  means  a  lower  price  at  the  factory. 
The  expanding  business,  therefore,  comes  at  length  to  the 
point  where  it  can  not  go  farther  at  the  prevailing  prices. 
Hence  the  business  man's  view  of  the  costs  is  that  they  de- 
termine price.  It  is  true  in  the  sense  that  the  supply  of  a 
particular  product  in  any  market  is  at  last  limited  by  cost 
to  marginal  producers  or  of  marginal  portions  of  supply. 
But  it  is  not  true  of  all  the  units  of  product  that  costs  deter- 
mine, or  equal,  market-price.  There  is  a  margin  above  costs 
to  the  successful  enterpriser  on  a  large  portion  of  his  output. 
The  margin  may  be  narrow  or  wide,  according  to  the  busi- 
ness. The  margin  is  ** profit,"  on  the  particular  sale,  and 
helps  to  determine  the  true  profit  remaining  at  the  end  of 
the  year. 

§  2.  Selling  and  cost-finding.  Speaking  generally,  there 
is  no  upper  limit  to  the  selling  price  the  seller  would  take, 
but  he  can  never  get  an  unlimited,  and  rarely  what  he  deems 
a  really  liberal  price.  Buyers  are  striving  to  buy  as  low  as 
they  can.  The  seller  must  often  decide  whether  to  sell  at  an 
offered  price  or  to  refuse  the  offer.  Success  in  getting  orders 
requires  under  most  circumstances  that  the  cost  of  each  article 


Ch.30]  costs  and  competitive  prices  371 

to  the  seller  shall  be  pretty  exactly  determined,  or  at  least  a 
minimum  fixed  below  which  the  selling  agent  must  not  go. 
The  ascertaining  of  the  cost  of  particular  articles,  which  be- 
fore a  study  of  the  facts  appears  so  simple,  is  in  a  literal  sense 
well  nigh  impossible.  It  is  easiest  where  the  whole  under- 
taking is  treated  as  one  transaction,  as  the  buying  of  a  house, 
perhaps  making  some  improvements  in  it,  and  selling  it. 
There  the  total  of  first  cost,  plus  costs  of  improvements,  taxes, 
insurance,  repairs,  fixed  charges,  etc.,  subtracted  from  sell- 
ing-price plus  other  receipts  as  rents,  etc.,  give  the  balance  as 
profit.  Similarly  it  is  easy  to  determine  with  sufficient  prac- 
tical accuracy  the  cost  of  the  whole  business  in  a  year,  which, 
subtracted  from  total  receipts  (and  taking  due  account  of 
the  difference  in  inventory  and  appraisement  of  the  plant  at 
the  beginning  and  end  of  the  year),  gives  the  profit.  But 
the  difficulty  is  in  deciding  how  much  of  this  total  cost  should 
be  allotted  to  particular  units  of  product,  for  most  of  the  costs 
have  been  incurred  for  a  number  of  different  units  which 
must  be  produced  at  once.  The  costs  are  joint,  and  not  sev- 
eral.    Some  simple  illustrations  will  make  this  clearer. 

§  3.  Examples  of  joint  costs.  A  woman  at  the  death  of 
her  husband  is  left  with  an  excellent,  well-furnished  house  and 
a  scanty  income.  For  sentimental  or  family  reasons,  what- 
ever they  be,  she  is  determined  to  keep  the  house  in  any  case, 
tho  it  is  larger  than  she  needs.  To  lighten  the  burden 
of  taxes,  repairs,  and  family  expenses,  she  wishes  to  let  some 
rooms  if  she  can  at  anything  above  cost.  Now  what  is  cost 
in  that  case?  To  her  it  would  consist  of,  first,  the  price  of 
the  extra  service  that  must  be  hired,  of  the  extra  washing, 
light,  and  heat,  of  the  extra  wear  and  tear  on  furniture,  linen, 
etc.,  as  compared  with  leaving  the  rooms  empty,  and  sec- 
ondly, enough  additional  to  make  it  "worth  while"  for  her- 
self— either  in  merely  psychic  terms,  trouble,  or  in  this  plus 
the  worth  of  her  time  in  doing  something  else  that  might  pay 
better.  She  would  not  need  to  count  a  fair  normal  return  on 
the  original  cost,  or  the  present  cost,  of  new  rooms  and  fur- 


372  ENTERPRISE  AND  PROFIT  [Pt.V 

niture,  for  she  has  them  and  intends  to  keep  them  in  any 
case.  It  is  only  the  extra  cost  attributable  to  taking  roomers 
that  need  be  considered,  and  the  minimum  addition  to  her 
income  need  be  no  more  than  the  meagerest  pay  at  which  she 
values  her  own  services.  This  minimum  price  of  bare  cost, 
yielding  nothing  to  the  main  investment,  may  be  also  the 
maximum  she  can  get  if  there  is  little  demand  for  rooms  in 
the  neighborhood.  If,  however,  there  is  a  brisk  or  growing 
demand  for  rooms  of  that  kind,  the  price  she  can  get  may  be 
higher  in  any  degree,  up  to  the  point  where  more  houses 
will  be  built,  and  rooms  let  at  prices  that  include  a  full  esti- 
mate of  the  cost  of  building,  of  new  furniture,  etc.  The  price 
at  that  point  may  be  called  a  normal  supply  price,  or  normal 
cost  price ;  but  before  there  has  been  time  to  build  new  houses 
the  price  of  room  rent  might  go  much  above,  as  it  had  before 
been  much  below,  this  normal  cost. 

Another  illustration  of  the  same  problem  in  a  different  set 
of  conditions  may  be  helpful.  An  autobus  service  was  begun 
between  a  small  city  and  a  village  a  few  miles  away.  A  few 
months  later  the  proprietor  declared  it  did  not  pay  the  cost  of 
running  it,  which  he  estimated  to  be  $7.50  a  day,  including 
repairs,  interest  on  the  cost  of  the  car,  depreciation,  etc.  This 
was  $1.8714  for  each  of  the  four  round  trips,  whereas  on  some 
trips  the  receipts  were  nothing  at  all.  He  admitted,  however, 
that  it  would  be  a  mistake  to  count  the  cost  and  receipts  of 
each  trip  separately,  and  that  the  success  of  the  whole  enter- 
prise depended  on  maintaining  a  regular,  dependable  service, 
even  tho  sometimes  the  car  traveled  empty.  The  light  trips 
were  helping  to  secure  the  traffic  that  paid  on  the  heavy  trips, 
on  some  of  which,  every  week,  receipts  were  as  much  as  $5. 
Taking  all  the  receipts  of  the  service  together,  however,  there 
was  still  a  deficit  of  a  few  dollars  a  week  on  the  average,  which 
the  owner  had  to  make  up  out  of  the  earnings  of  his  garage. 
After  the  auto  service  was  started  it  helped  to  advertise  the 
garage,  and  many  bicyclists  and  autoists  along  that  line  who 
had  never  come  to  the  garage  found  it  a  very  convenient  place 


Ch.  30]  COSTS  AND  COMPETITIVE  PRICES  373 

to  send  for  repairing  and  for  supplies.  The  increased  profits 
of  the  garage  about  offset  the  loss  on  the  bus  service.  Another 
new  kind  of  business  was  developed,  as  the  autobus  in  summer 
was  often  hired  for  parties  to  the  shore  at  $15  to  $20  a  day, 
and  at  such  times  a  smaller  car  could  be  sent  on  the  regular 
trip.  And  there  were  some  other  incidental  advantages  that 
at  length  converted  a  tale  of  loss  into  a  story  of  business  suc- 
cess. 

§  4.  Main  classes  of  costs.  These  two  cases  present  in 
comparatively  simple  form  the  problem  which  every  larger 
business  involves  in  very  much  more  difficult  form.  The  total 
costs  of  any  business  are  roughly  distinguishable  as  fixed  costs 
(or  fixed  charges)  and  variable  costs.  Fixed  costs  are  those 
which  remain  unchanged  on  the  business  as  a  whole,  or  on 
some  department,  no  matter  what  the  size  of  the  output.  There 
are  some  costs,  as  the  rent  of  office,  factory  and  store,  salary 
of  manager  and  clerks,  etc.,  which  would  go  on  if  nothing  were 
sold,  unless  the  business  were  closed.  Variable  costs  are  those 
which  are  attributable  solely  and  exactly  to  particular  units 
of  product,  rising  and  falling  exactly  in  proportion  to  the 
output.^  In  truth,  costs  share  these  characteristics  in  a  great 
many  degrees,  are  more  or  less  fixed  or  variable,  and  are  never 
(or  with  very  meager  exceptions)  either  absolutely  fixed  or 
absolutely  variable. 

The  variable  costs  are  also  called  direct  because  put  upon 
the  particular  unit  of  goods,  and  the  fixed  costs  are  correspond- 
ingly called  indirect,  or  overhead  charges.  It  is  a  very  diffi- 
cult matter,  and  yet  one  of  very  great  importance,  to  arrive 
at  principles  and  practical  working  rules  by  which  in  each 
business  the  various  elements  of  cost  may  be  allocated  to  dif- 
ferent departments,  classes  of  goods,  and  particular  units  of 

1  "Variable"  does  not  mean  that  the  unit  price  of  the  factor  neces- 
sarily changes,  e.g.,  that  the  wage  paid  per  piece  for  making  the  articles 
varies;  nor  "fixed"  that  the  unit  price  of  these  factors  is  unchanging. 
The  meaning  is  that  in  the  one  case  more  are  needed,  and  in  the  other 
the  amount  needed  remains  unchanged,  regardless  of  the  size  of  the  out- 
put. 


374 


ENTERPRISE  AND  PROFIT 


[Pt.V 


output.  For  this  end  a  special  art  of  cost  accounting  has  been 
developed,  and  a  special  class  of  expert  cost  accountants.  The 
principal  elements  of  costs  distinguished  in  cost  accounting  are 
represented  in  Figure  46. 


Pseudo-receipu 

C>th  discountt 
Doubtful  account! 
Outward  freights. 


Fixed  charge} 

Depreciation 

Iiuurance 

Tue> 

Rent  (nd  Interett 


General  administration 
Salaries 
General  office 
Legal  fees,  etc. 


Selling  Cost 

Commissions,  advertising 


MtAufacturing  overhead 
General  suppUci 
Indirect  labor 
Depreciation  of  tool*,  etc. 


Fig.  46.  Elements  of  cost.  This  figure  may  be  taken  to  represent 
either  the  total  costs  of  a  year's  business  or  the  costs  of  a  particular 
unit  of  goods.  In  the  first  sense  the  whole 
rectangle  represents  the  total  receipts  from 
sales.  Of  these,  the  part  marked  1  repre- 
sents deductions  from  sales  which  are 
pseudo-receipts  (mere  bookkeeping  items) 
and  might  be  first  deducted,  leaving  the  rest 
of  the  column  to  be  distributed  among  costs 
and  profits.  (See  items  below.)  Some  of 
these  items  are  differently  classified  by  cost 
accountants.  "Cash  discount,"  allowed  to 
customers  for  prompt  payment  of  bills  is, 
perhaps  for  convenience  rather  than  logic,  in- 
cluded by  some  in  fixed  charges.  "Doubtful 
accounts"  is,  together  with  "depreciation  on 
plant"  (see  fixed  charges),  included  in  an- 
other general  class  of  "reserves"  set  aside 
to  cover  these  items.  "Outward  freights," 
those  paid  on  goods  shipped  to  customers  as 
a  part  of  the  agreement  at  sale,  might  per- 
haps more  logically  be  counted  as  a  selling 
cost.  At  the  bottom  are  shown  the  most 
variable  elements  of  costs  in  manufacturing, 
which  are  materials  (8)  and  direct  labor 
(7),  the  kind  employed  directly  on  the  prod- 
uct, and  which  in  large  part  can  be  em- 
ployed and  discharged  as  need  requires. 
Then  come  the  manufacturing  overhead  (6), 
which  includes  general  factory  expenses,  as  factory  oflice  supplies,  heat, 
light,  power,  repairs,  and  renewals;  labor,  indirect,  such  as  foremen, 
porters,  cleaners,  messengers,  watchmen,  teamsters;  salaries  of  superin- 
tendent or  master  mechanic,  and  clerical  help  on  shop  accounts  (as 
distinct  from  the  work  of  the  general  administration  or  of  the  selling 
department)  ;  and  depreciation  of  tools  and  machinery  as  distinct  from 
the  general  plant. 

Then  come   (5)   selling  cost,  the  main  items  of  which  are  salesmen's 


Direa  labor  on  products 


Mueriali  for  producU 


Ch.  30]  COSTS  AND  COMPETITIVE  PRICES  375 

salaries  and  commissions,  and  advertising;  (4)  general  administration, 
which  includes  salaries  of  the  officers,  and  fees  to  directors,  and  general 
office  expense,  traveling,  printing  and  stationery  (not  advertising),  post- 
age, telephone  and  telegraph,  legal  retainers  and  fees;  (3)  fixed  charges, 
which  include  depreciation  (if  not  put  into  a  special  reserve),  insurance 
on  the  plant  (which  as  a  safeguard  against  fire,  is  a  substitute  for 
depreciation),  taxes,  and  finally  rent  and  interest.  These  items  may 
cover  either  actual  rents  and  interest  paid,  or  hypothetical  rent  and 
interest,  the  normal  amount  of  income  on  a  passive  investment  of  the 
same  estimated  value.  The  remainder  at  the  close  of  the  year,  as  in- 
dicated in  the  shaded  space,  is  profits  in  a  wider  or  narrower  sense, 
according  as  it  does  or  does  not  include  the  amount  normally  attribut- 
able to  a  passive  investment. 

§  5.  The  problem  of  cost  accounting.  The  difficult  task 
of  cost  accounting  is  to  break  up  this  annual  total  into  minute 
fractions  and  to  distribute  them  in  due  proportion  so  as  to 
tell  if  need  be  the  cost  and  profit  on  any  unit  of  product. 
Sometimes  a  large  undertaking  turns  out  a  single,  homo- 
geneous phj^sical  product,  as  gas,  electricity,  water,  bricks,  salt, 
paper  of  a  certain  grade,  spools,  pig  iron,  etc.  Here  a  unit 
cost  and  profit  can  easily  be  estimated  from  the  total  annual 
figures;  but  if  the  management  desires  to  ascertain  the  cost 
of  each  of  the  series  of  processes  through  which  each  unit  goes, 
the  problem  becomes  more  complex.  Another  type  of  under- 
taking makes  numerous  kinds  of  goods,  but  in  standard  pat- 
terns, such  as  tools,  machines,  stoves,  wooden  furniture,  car- 
pets, cloth,  etc.  Here  the  unit  cost  is  estimated  by  following 
the  product  through  the  various  departments,  and  this  cost 
figure  once  fixed  can  be  used  continuously  and  repeatedly 
tested.  Another  type  of  business  does  all  its  work  on  special 
orders,  such  as  job  printing,  electric  installation,  house  con- 
tracting, etc.  The  constant  recurrence  of  somewhat  similar 
kinds  of  jobs  tests  the  estimates  and  permits  a  pretty  exact 
allowance  to  be  made  for  the  usual  delays  and  losses. 

§  6.  Homogeneous  products  with  unequal  costs.  But  no 
matter  how  carefully  these  unit-cost  figures  are  worked  out, 
the  salesman  is  tempted  repeatedly  to  ignore  them.    He  sees 


876  ENTERPRISE  AND  PROFIT  [Pt.  V 

a  chance  to  sell  below  cost  and  still  make  a  profit.  This  is 
the  paradox  of  price  cutting.  It  is  an  ever-besetting  tempta- 
tion of  the  business  man,  sometimes  leading  him  to  profits, 
but  often  to  his  undoing.  The  key  to  the  mystery  is  already 
in  our  hands:  it  is  that  all  costs  are  in  some  measure  joint- 
costs,  and  that  every  estimated  several-cost  has  something  of 
arbitrariness  in  it.  Take  a  case  where  this  would  seem  to  be 
least  true,  where  the  entire  output  of  a  large  industry  is  a 
single  homogeneous  product,  such  as  water,  electric  current, 
etc.  Here  surely,  if  anywhere,  the  unit  cost  is  certain,  being 
the  simple  arithmetic  quotient  of  total  cost  divided  by  the 
number  of  units.  But,  no,  as  frequently  here  as  in  any  busi- 
ness the  seller  finds  differences  of  a  real  character  and  is 
forced  to  assume  differences  in  other  cases  in  order  to  make 
a  sale.  In  some  cases  he  finds  the  estimated  cost  to  be  in- 
correct, in  others  he  finds  it  to  be  futile.  The  cost  of  reading 
meters,  keeping  up  the  service  pipes,  and  rendering  bills  is 
greater  per  unit  of  water,  gas,  or  electricity,  for  small  users 
than  for  larger  ones.  This  can  be  adjusted  by  making  a  flat 
fixed  charge  to  each  consumer  for  meter  and  labor,  little  if 
any  more  for  large  than  for  small  consumers,  and  a  separate 
charge  per  unit  of  product  alike  to  all.  For  example,  if  elec- 
tricity is  charged  at  13  cents  a  kilowatt  hour,  the  bills  would  be 

Customer  A,  using    10  kilowatts  monthly  @  13  cents  =  $  1.30 
Customer  B,  using  100  kilowatts  monthly®  13  cents  =  $13.00 

If  a  charge  of  $1  a  month  per  customer  is  made  for  meter, 
etc.,  and  a  separate  charge  of  3  cents  per  kilowatt  hour, 
the  bills  would  be 

Customer   A,   uniform  charge   $1.00   plus  $  .30  =  $1.30,   actual   price, 

13  cents  per  k.  h. 
Customer   B,   uniform  charge  $1.00   plus   $3.00  =  $4.00,   actual   price, 

4  cents  per  k.  h. 

§  7.  Principle  of  charging  what  the  trafl&c  will  bear.  But 
where  no  such  reasonable  explanation  can  be  found,^  and  the 

2  There  are  nimierous  other  reasons  for  classifying  customers,  which 
must  be  reserved  for  discussion  with  practical  problems.  The  example 
is  BuflBcient  for  our  present  purpose  of  explaining  the  principle. 


Ch.  30]  COSTS  AND  COMPETITIVE  PRICES  377 

outward  conditions  all  point  to  a  uniform  cost,  the  seller  is 
repeatedly  faced  with  a  situation  where  at  the  moment  and, 
as  he  says,  ' '  for  practical  purposes, "  he  is  impelled  to  assume 
a  difference.  The  business  is  there  as  '*a  going  concern,"  a 
large  part  of  the  charges  are,  or  appear  to  be,  fixed  charges 
— in  any  event  will  not  be  increased  by  the  particular  increase 
of  product  in  question,  which  will  more  fully  and  proportion- 
ally utilize  certain  parts  of  the  equipment.  The  new  business 
can  not  be  secured  at  the  average  rate  paid  by  a  similar  class 
of  customers  (possibly  because  of  this  customer's  advantageous 
position  to  buy  somewhere  else,  or  because  he  can  produce  for 
himself  more  cheaply  than  the  average  customer,  etc.).  A 
lower  rate  is  made  to  get  the  new  business,  while  the  old  cus- 
tomers continue  to  pay  the  old  rates,  the  result  being  that  the 
total  profits  of  the  enterprise  are  increased.  There  is  scarcely 
an  enterprise,  large  or  small,  in  which  essentially  this  situation 
does  not  sometimes  present  itself. 

But  note  this:  unless  the  price  to  the  other  customers  is 
reduced  to  the  new  rate,  there  is  here  discrimination  in  prices, 
unlike  charges  to  like  customers,  for  substantially  the  same 
service.  The  price  is  on  the  principle  of  charging  what  the 
traffic  will  bear.  A  portion  of  the  customers  may  be  bearing 
all  or  nearly  all  the  fixed  charges,  while  another  portion  is 
bearing  little  more  than  the  variable  charges  occasioned  by 
their  part  of  the  output.  By  a  sort  of  historical  accident  the 
late  comers  get  the  benefit  of  the  economies  of  an  established 
business  which  the  early  comers  made  possible.  Altho  the  old 
customers  are  charged  no  more  than  they  were  before,  they  are 
now  charged  more  than  are  other  customers,  possibly  their 
competitors ;  and  this  may  have  practical  effects  quite  as  seri- 
ous to  them  as  if  they  were  charged  absolutely  more  than 
they  were  before. 

§  8.  How  prices  are  limited  under  competition.  The 
phrase  "charging  what  the  traffic  will  bear"  is  usually  heard 
in  connection  with  monopoly-price.  Yet  every  competitive 
seller  gets  all  he  can  for  his  goods,  and  still  make  a  sale.    This 


378  ENTERPRISE  AND  PROFIT  [Pt.V 

is  "charging  all  the  traflEic  will  bear,"  but  under  competition 
the  traffic  will  not  bear  as  much  as  under  monopoly.  Each 
buyer  is  following  the  same  principle,  giving  as  little  of  the 
price-good  as  he  needs  to  give  to  get  the  sale-good ;  in  popular 
phrase,  he  is  trying  to  get  the  most  for  his  money.  Still  out 
of  these  various  desires  to  get  indefinitely  high  prices, 
emerges,  under  true  competitive  conditions  in  a  market,  one 
common  market-price.  (See  above.  Chapter  7.)  This  is  the 
best  price  any  trader  can  get  on  the  principle  of  charging 
what  the  traffic  will  bear  in  a  truly  competitive  market.  In  a 
market  for  homogeneous  products  where  there  are  on  each 
side  of  the  market  at  least  two  truly  competing  traders,  the 
attempt  of  any  trader  to  discriminate,  to  get  more  than  the 
common  market-price,  simply  deprives  him  of  that  sale.  He 
eliminates  himself  as  a  seller  in  respect  to  that  unit. 

This  condition  of  two-sided  competition  is  lacking  in  count- 
less cases  and  in  many  respects  in  the  business  world.  The 
slightest  lack  of  homogeneousness  in  the  goods  to  be  sold 
breaks  the  market  up  into  more  or  less  separate  markets,  and 
there  is  a  chance  for  the  seller  to  sell  the  different  qualities 
at  different  prices,  still,  however,  at  a  competitive  price,  alike 
to  all  for  the  same  quality. 

§  9.  Borderland  of  monopoly.  Ownership  of  a  particu- 
lar knife,  pencil,  book,  makes  one  the  unique  seller  of  it,  but 
confers  no  monopoly  power,  as  the  power  of  substitution  is 
practically  absolute;  the  welfare  of  no  one  depends  in  any 
appreciable  measure  on  that  particular  pencil.  The  simplest 
substitution  a  buyer  can  make,  ordinarily,  is  that  of  a  com- 
modity of  the  same  kind,  offered  by  another  seller.  The  effec- 
tive limitation  of  the  competitive  seller  is  that  if  he  tries  to 
charge  more  than  the  fair  market  price,  the  buyer  is  able  to 
buy  of  some  one  else. 

In  many  enterprises  in  this  same  manner  the  surplus  of 
selling  price  over  costs  as  a  whole  is  ruled  by  a  very  strict 
competition  in  the  long  run,  and  yet  the  prices  of  the  sep- 
arate products  of  the  enterprise  have  the  appearance  of  being: 


Ch.  30]  COSTS  AND  COMPETITIVE  PRICES  379 

quite  noncompetitive.  The  organizers  of  an  entertainment, 
whether  for  private  profit  or  for  charity,  hire  a  hall  and  as- 
sume the  expense  of  the  entertainment,  the  whole  cost  becom- 
ing thus  a  fixed  charge.  The  prices  of  the  various  seats  are 
then  fixed  with  a  view  to  getting  the  maximum  total  receipts. 
As  regards  that  particular  entertainment  there  is  literally  a 
monopoly.  If  half  the  seats  are  likely  to  be  empty  it  will  not 
"pay"  to  reduce  the  prices  so  low  that  all  the  seats  could  be 
sold.  That  might  cause  the  price  to  be  a  negative  one — pay- 
ment for  attending.  It  pays  better  to  have  a  graded  scale  of 
prices  to  different  parts  of  the  house,  and  let  some  seats  go 
unsold. 

These  examples  serve  to  show  that  in  a  literal  sense  every 
man  is  the  exclusive  seller  of  the  identical  thing  he  has  to  sell 
and  yet  may  have  no  monopoly  power  to  raise  prices  above  a 
normal,  competitive  rate.  He  may  withhold  the  sale-good  or 
place  any  reserve  valuation  upon  it  that  he  pleases,  and  a 
customer  must  pay  that  or  go  without  that  particular  unit  of 
labor  or  product.  But  this  in  most  cases  gives  to  the  seller  a 
quite  negligible  degree  of  power  to  influence  price,  and  in 
many  other  cases  where  there  is  some  power,  there  is  no  mo- 
tive. There  is,  therefore,  despite  some  measure  of  power  to 
restrict  supply,  no  exercise  of  the  power  sufficient  to  constitute 
a  social  problem  of  monopoly. 

§  10.  Difficulty  of  departing  from  average  costs  in  com- 
petition. Consider  the  case  of  a  manufacturer  who  has  no 
advantages  not  open  to  capable  competitors  and  who  can  sell 
his  small  and  easily  transported  products  over  a  wide  area.- 
Such  products,  which  by  their  nature  seem  typically  competi- 
tive, are  shoes,  hardware  specialties,  writing  tablets,  etc.  The 
manufacturer  makes  and  sells  them  through  agents  both  to 
wholesale  and  retail  merchants,  realizing  a  good  average  profit 
on  the  whole.  Let  him  apply  the  principle  (paradox)  of  price 
cutting  to  one  pattern  and  sell  it  at  a  price  which  is  nearer 
to  bare  cost.  He  will  sell  it  more  easily  but  it  will  contribute 
little  or  nothing  to  profits  except  a*  it  may  be  an  advertise- 


380  ENTERPRISE  AND  PROFIT  [Pt.V 

ment,  "a  leader."  Another  pattern  gives  a  large  unit-profit, 
and  is  "a  money  maker."  This  will  be  the  special  target  of 
competition,  and  will  be  more  difficult  to  sell.  If  each  compet- 
itor has  his  leaders,  keen  buyers  can  make  leaders  a  good  share 
of  their  purchases.  Thus  real  competition  searches  out  each 
inconsistency  of  cost  accounting  and  is  constantly  leveling 
down  the  "money-makers"  to  a  normal  profit.  Again  and 
again  a  growing  and  seemingly  prosperous  business  fails.  The 
management  have  produced  and  sold  the  goods,  but  have  cut 
the  margin  of  profit  too  close.  Meantime  other  more  conserva- 
tive competitors,  trying  to  maintain  prices,  have  been  pushed 
almost  if  not  quite  into  bankruptcy.  Many  a  firm  with  a 
stable  policy,  a  golden  mean  between  rash  and  timid,  has 
passed  through  many  such  an  ordeal,  and  has  won  a  sub- 
stantial success  through  generations  from  grandsire  to  grand- 
son, while  competitors  have  risen  and  fallen. 

In  a  competitive  market,  there  being  several  sellers,  the 
buyer  stands  ready  to  take  from  any  one  of  the  sellers.  If 
any  one  of  the  sellers,  whether  formerly  marginal  or  not, 
dropped  out,  and  no  one  took  his  place,  the  price  would  rise. 
But  the  very  essence  of  a  condition  of  competition  is  this,  that 
it  would  not  pay  any  one  seller  to  drop  out  for  the  purpose  of 
raising  the  general  market-price.  He  would  lose  more  be- 
cause of  withholding  these  units  (or  ceasing  to  produce  them) 
than  he  could  gain  by  the  additional  profit  he  would  make  on 
the  units  he  continued  to  sell.  He  has,  virtually,  to  take  the 
market-price  as  a  fixed  fact  for  the  time,  so  far  as  he  is  con- 
cerned, and  to  decide  whether  at  that  price  and  the  profit  it 
yields  him,  he  cares  to  continue  selling.  To  put  the  same 
thing  slightly  differently ;  if  he  does  not  continue,  other  com- 
petitors stand  ready  to  sell  at  the  same  price,  or  at  a  price 
so  little  higher  that  he  will  not  profit  on  the  whole  by  the 
change.  His  limitation  of  production  yields  a  net  gain  to 
his  competitors  but  a  net  loss  to  himself. 


CHAPTER  31 
MONOPOLY-PRICES;  LARGE  PRODUCTION 

§  1.  Tests  of  monopoly  control.  §  2.  Uniform  monopoly-price  in  rela- 
tion to  costs.  §  3.  General  principle  of  uniform  monopoly-price  and 
cost.  §  4.  Temporary  and  limited  monopoly  and  discrimination.  §  5. 
Theory  of  discriminatory  monopoly-prices.  §  6.  Problem  of  the  economy 
of  large  production.  §  7.  Economy  of  labor  in  large  production.  §  8. 
Economical  use  of  machinery  in  large  production.  §  9.  Economy  of  buy- 
ing and  selling  in  large  quantities.  §  10.  Certain  limitations  of  large 
production.  §  11.  Certain  disadvantages  of  large  buying  and  selling. 
§  12.  Large  production  and  the  two  types  of  prices.  §  13.  Monopoly 
element  in  price-fixing. 

§  1.  Tests  of  monopoly  control.  The  essential  condition 
that  distinguishes  monopoly  from  competition  is  the  buyer's 
lack  of  the  power  of  substitution  of  one  seller  for  another. 
The  test  of  the  degree  of  monopoly  control  is  the  seller 's  power 
to  continue  raising  prices  without  thereby  driving  enough 
buyers  to  other  goods  or  to  other  sellers  to  prevent  his  making 
some  net  profit  by  raising  the  price.  A  seller  is  competitive 
when  he  must  take  the  general  market-price  as  a  fixed  fact, 
and  can  decide  only  whether  and  how  much  to  sell  at  that 
price.  A  seller  is  a  monopolist  when  he  represents  such  a 
large  proportion  of  the  offers  that  he  may  withhold  a  part, 
raise  the  market-price,  and  make  a  larger  profit  on  the  smaller 
sale.  The  competitive  seller  makes  his  profit  by  selling  all 
he  can  at  the  market-price;  the  monopolist  makes  his  profit 
by  selling  less  and  altering  the  whole  price  equilibrium. 

Ownership  of  an  important  fraction  of  an  entire  species  of 
goods  may  give  some  power  to  affect  price.  If  the  control  is 
slight,  a  very  small  rise  of  price  will  bring  in  competitors. 

381 


382  ENTERPRISE  AND  PROFIT  [Pt.  V 

The  monopoly  profits  in  this  case  either  must  be  very  small 
or  they  will  be  very  brief.  Those  outside,  controlling  a  large 
supply,  will  be  tempted  by  large  profits  to  market  it  at  once 
and  to  increase  it  as  fast  as  possible.  One  owning  a  large 
part  of  the  desirable  building  sites  or  houses  in  a  town  may 
gain  by  occasionally  letting  one  stand  vacant  in  order  to  drive 
better  bargains  with  tenants.  A  trade-union,  controlling  most 
of  the  labor  supply  of  one  kind  in  a  town,  may  gain  as  a 
whole  by  keeping  some  of  their  members  unemployed  at  times. 
But  the  test  of  monopoly  is  that  a  gain  results  from  a  higher 
price  and  fewer  sales.  It  begins  at  the  point  where  there  is 
a  motive  to  limit  the  supply  in  accordance  with  the  paradox 
of  value.  The  control  of  an  entire  species  of  goods  gives 
price-fixing  power  limited  only  by  substitution  of  goods.  Even 
tho  one  person  controlled  all  the  coal  in  any  market,  its 
price  still  would  be  limited  by  the  substitution  of  wood,  oil, 
etc.  If  there  were  but  one  possible  source  of  meat  supply, 
most  people  could  live  without  meat,  but  if  one  person  owned 
all  food  of  every  kind,  control  of  price  would  be  as  complete 
as  is  conceivable.  The  monopolist  would  be  the  absolute 
despot  of  the  lives  of  his  fellows.  The  monopoly  of  great 
species  of  goods  can  thus  be  seen  gradually  to  merge  from 
one  grade  into  another.  Monopoly  is  a  matter  of  quality  as 
well  as  quantity.  There  is  more  or  less  of  it  in  the  different 
industries,  and  it  varies  over  time  and  territory.  The  monop- 
olist aims,  just  as  the  competitor  does,  to  get  the  price  that 
gives  the  maximum  gain.  The  monopolist,  however,  is  in  a 
more  or  less  favored  position,  as  he  can  raise  his  price  and  yet 
retain  enough  of  his  customers  to  gain  by  the  change. 

§  2.  Uniform  monopoly-price  in  relation  to  costs.  Now 
the  monopolist  also  in  his  sales  is  limited  by  cost,  but  not  so 
often  or  in  such  a  compelling  way  as  is  the  competitive  seller. 
Within  the  range  of  his  monopoly  power  he  may  either  sell 
his  whole  product  at  a  price  well  above  cost  plus  a  profit  or 
he  may  discriminate  more  successfully  than  can  the  seller  ex- 
posed to  competition,  and  thus  sell  all  but  a  small  part  of  his 


Ch.  31]         MONOPOLY-PRICES;  LARGE  PRODUCTION 


383 


product  at  a  wide  margin  of  profit.  Let  us  see  how  monopoly 
price-fixing  is  affected  by  cost.  The  crude  monopoly-price 
(see  above,  Chapter  8),  is  that  which  yields  the  largest  total 
selling  price  (this  giving  the  largest  profit)  only  when  cost 
is  zero.* 

The  highest  uniform  price  which  it  is  to  the  interest  of  a 
monopoly  to  charge  is  that  which  yields  the  largest  profit; 
that  is,  the  largest  difference  between  total  price  and  total 


n 

1 

A 

Unt3  of  600C/S 


Fig.  47.    Monopoly-Pbick,  Inelastic  Demand.* 

*  In  each  case  the  line  marked  a  is  the  level  of  monopoly-price,  and  b 
that  of  competitive  price  on  the  assumption  that  one  unit  is  a  fair 
competitive  profit  ("fair"  meaning  enough  to  give  a  motive  to  enter- 
prise). 

( 1 )  Under  the  assumed  conditions  of  demand  as  represented  by  the 
figure,  crude  monopoly-price  is  6,  sales  are  3,  and  total  profits  18. 

(2)  If  cost  is  3,  monopoly-price  is  8,  sales  are  2  and  profits  10. 
Competitive  price  being  4,  sales  would  be  4,  and  profits  4. 

(3)  If  cost  is  4,  monopoly-price  is  8,  sales  are  2,  and  profits  8.  Com- 
petitive price  would  be  5  and  sales  3^2- 

(4)  If  cost  is  5,  monopoly-price  is  still  8,  and  sales  2,  but  profits  fall 
to  6.     Competitive  price  would  be  6,  and  sales  3. 

(5)  If  cost  is  6,  monopoly-price  is  9,  sales  1%.  and  profits  4%. 
Competitive  price  would  be  7,  and  sales  2^2- 

( Because  of  the  very  small  numbers  used  in  the  scale,  quantities  have 
been  expressed  in  half  units.) 

1  It  is  represented  by  the  largest  rectangle  ( product  of  price  per 
imit  by  number  of  units  sold)  which  can  be  inscribed  within  the  coordi- 
nates and  the  hypothetical  demand  curve.     (Figure  14,  ch.  8.) 


384 


ENTERPRISE  AND  PROFIT 


[Pt.V 


cost.  This  is  the  product  of  the  profit  (not  price)  per  unit 
by  the  number  of  units  sold.^  This  never  can  be  less  than 
crude  monopoly-price.  In  cases  of  very  inelastic  demand 
it  may  with  certain  ranges  of  price  be  no  greater ;  that  is,  the 
i  2  3  4 


i 

i 

12    3    4    5    6   7 
Unitj  of  Sood^ 

Fig.  48.     Monopoly-Peice,  Medium  Elasticity.* 

*  Represents  conditions  as  in  the  preceding  figure,  except  that  demand 

is  somewhat  more  elastic. 

(1)  If  cost  is  zero,  monopoly-price  would  be  4.  Competitive  price 
must  sink  to  nothing,  but,  if,  with  limited  supplies,  demand  continues, 
the  amount  of  the  price  would  eventually  all  be  imputed  to  cost  (plus 
the  minimum  profit). 

(2)  If  cost  is  2,  monopoly  price  is  5,  sales  are  3,  and  profits  9 
(Competitive  price  3,  and  sales  5.) 

(3)  If  cost  is  3,  monopoly-price  is  By^,  sales  are  2 Vs.  and  profits  GYg. 
(Competitive  price  4,  sales  4.) 

(4)  If  cost  is  4,  monopoly-price  is  6,  sales  2,  and  profits  4.  (Com- 
petitive price  5,  sales  3.) 

entire  cost  in  such  cases  is  a  subtraction  from  what  would 
otherwise  be  monopoly  profit. 

§  3.  General  principles  of  uniform  monopoly-price  and 
cost.  Inspection  of  Figure  47  and  of  the  figure  showing  a 
medium  demand  (Figure  48)  and  a  more  elastic  demand  (Fig- 
ure 49)  reveals  certain  general  effects.  Except  in  some  pe- 
culiar situations  an  increase  of  cost  raises  the  theoretical 
monopoly-price  and  reduces  sales,  and  decrease  of  cost  low- 
ers theoretical  monopoly-price  and  increases  sales.  The  more 
elastic  the  demand  for  an  article,  the  less  is  the  difference  be- 

2  This  may  be  represented  by  the  largest  rectangle  that  can  be  in- 
scribed within  the  price  line  and  the  cost  line,  drawn  above  the  base 
line,  and  parallel  with  it. 


Ch.31]         monopoly -PRICES;  LAEGE  PRODUCTION 


385 


tween  competitive  price  and  monopoly-price.  The  less  elastic 
the  demand  the  greater  the  motive  for  monopoly,  and  the  more 
elastic  the  demand  the  less  the  motive  for  a  general  monopoly- 
price.  In  some  cases,  where  demand  is  very  inelastic,  the 
first  increments  of  cost  have  slight  effect  either  on  monopoly- 
price  or  on  the  amount  advantageously  produced ;  cost  within  a 
certain  range  of  monopoly  falls  largely  upon  profits  and  at 
certain  situations  may  within  a  narrow  range  fall  entirely 
upon  them.  The  profits  per  unit  being  large,  the  price  can 
not  be  raised  without  reducing  sales.  Choice  will  be  made  to 
give  the  largest  profits  (unit  profit  multiplied  by  sales).  In 
this  it  is  generally  true  that  the  greater  the  ratio  of  the  cost 


Cost  i 


^\^ 

Compe+i 

fivePrice^v^ 

^\^ 

'mrnrn^. 

Cost  3 

Monopoly  Price 

Xompeti+ive  Price 


5  (O   II  5  S 

Fig.  49.     Monopoly-Pmck,  Mobk  Elastic  Demand.* 
*  In  comparing  this  with  the  preceding  figures  the  general  principles 
in  sec.  3  appear. 

to  the  crude  monopoly-price  (other  things  equal)  the  less  is 
the  range  of  monopoly  power.  The  amount  of  sales  that  is 
possible  with  the  higher  monopoly-price  is  always  less  than 
with  a  competitive  price.  Monopoly-price  at  any  level  of 
costs  from  zero  upwards  is  always  higher  than  a  competitive 
price  (when  costs  are  the  same  for  competitors  and  for  mo- 
nopoly). We  must  note  later  the  peculiar  case  where  mo- 
nopoly cost  is  lower;  that  is,  where  cost  falls  with  quantity  of 
output,  and  where  large  output  is  dependent  on  monopoly. 

§4.  Temporary  and  limited  monopoly,  and  discrimina- 
tion. The  foregoing  applies  to  uniform  monopoly-price. 
This  is  sometimes  the  problem  presented  to  the  monopolist, 


385  ENTERPRISE  AND  PROFIT  [Px.V 

as  to  the  manufacturer  of  a  patented  article  in  determining 
the  advertised  price  of  an  article.  Even  then,  however,  some 
variation  in  price  may  be  made  by  paying  freights,  giving 
cut  prices  to  wholesale  dealers  in  some  localities,  because  of 
distance,  or  of  peculiar  condition  of  competition  with  a  similar 
article,  or  on  the  principle  of  dumping,  etc.  Again  and  again 
the  monopolist  is  tempted  to  depart  from  the  uniform  monop- 
oly-price— to  maintain  it  within  the  range  of  monopoly  power, 
but  to  cut  it  by  successive  reductions  as  the  conditions  shade 
off  toward  competition,  as  they  always  do,  more  or  less. 

If,  however,  the  better  quality  or  the  particular  thing 
needed  is  in  the  hands  of  one  seller,  there  is  a  temporary  and 
limited  measure  of  monopoly.  For  example,  a  cabman 's  busi- 
ness as  a  whole  is  usually  competitive,  as  any  one  is  free  to 
engage  in  it  if  profits  seem  high.  (There  are,  however,  cases 
of  monopoly  through  exclusive  rights  to  certain  locations, 
etc.)  But  in  many  cases  the  cabman  has  a  distinct  bargain- 
ing advantage  over  a  passenger,  as  when  no  other  cab  is  in 
sight,  or  on  a  rainy  day.  However,  it  may  not  always  be 
"good  business"  to  yield  to  the  temptation  to  get  the  higher 
price.  In  a  small  town  where  men  know  each  other,  the  cab 
fares  charged  to  residents  are  not  often  discriminatory,  for 
regular  patrons  resent  this  and  the  cabman  would  lose  patron- 
age. The  sole  druggist  in  a  small  town  might  occasionally 
get  very  high  prices  from  particular  customers  at  times  of  ill- 
ness, but  he  would  thus  drive  away  much  of  his  custom,  and 
would  tempt  a  fairer  and  less  grasping  competitor  to  come 
in.  Public  opinion  develops  as  to  what  is  a  fair  price  to  be 
asked  alike  of  all.  The  customary  price  has  both  a  moral  and 
a  legal  sanction.  Thus,  when  men  and  capital  are  free  to 
come  and  go,  there  results  an  average  or  normal  return  for 
ability  and  agents  of  a  certain  grade.  Prices  come  to  equilib- 
rium and  continue  pretty  regularly  to  be  virtually  compet- 
itive, for  they  are  determined  by  forces  of  competition,  ever 
ready  to  appear  where  charging  more  than  a  normal  supply 
price  yields  more  than  ordinary  returns  to  active  investors. 


Ch.  31]         MONOPOLY-PRICES;  LARGE  PRODUCTION 


387 


§  5.  Theory  of  discriminatory  monopoly-prices.  That  a 
field  of  monopoly  exists  may  be  very  certain,  when  it  may  be 
very  difficult  to  find  just  who  are  the  buyers  who  could  be 
charged  a  higher  price,  and  just  how  to  make  them  pay  it. 
If,  however,  in  the  measure  that  it  can  be  done,  it  is  done, 
there  results  a  series  of  prices ;  highest  to  those  buyers  in  the 


F.eld     of 
Price  Cutting 


II  .12   13  I*    IJ 


Fig.  50.     Peicb  Discrimination  in  the  Field  of 
Monopoly.* 

*  The  monopoly-price  figure  represents  at  its  left,  in  the  region  of 

higher  price,  that  field  within  which  the  monopoly  under  the  particular 

conditions  has  a  certain  degree  of  control,  and  at  the  right  in  the  region 

of  lower  prices,  the  successive  levels  at  which  either  substitutes  would  be 

adopted  or  competitors  would  come  in  and  take  away  the  trade. 

field  of  monopoly,  low  in  the  field  of  competitive  prices,  and 
possibly  still  lower  in  a  price-cutting,  rate-war  field,  where 
the  monopoly  is  striving  to  drive  some  competitors  out  of  cer- 
tain businesses.  (See  Figure  50.)  Assuming  that  the  nor- 
mal unit  cost  is  4,  we  may  find  that  it  is  possible  for  a  monop- 
oly to  get  for  a  part  of  its  product  prices  varying  from  5  to  9, 
while  elsevv^here,  in  the  fields  of  its  competitors,  cutting  prices 
down  to  cost  or  even  below.  As  some  of  its  competitors  were 
driven  out  of  their  fields,  the  range  of  the  monopoly's  control 
of  the  market  would  gradually  widen.  The  shape  of  the  de- 
mand curve  would  thus  change. 

The  region  from  12  to  15,  would,  as  soon  as  competitors 
were  ruined,  be  transferred  to  the  other  end  of  the  diagram. 
Where  prices  had  been  very  low  they  would  become  very  high, 
and  remain  so  indefinitely  until  competition  again  threatened. 


888  ENTERPRISE  AND  PROFIT  [Pt.  V 

Altho  competitors  see  the  lure  of  high  profits,  they  fear  the 
loss  of  their  whole  investment.  Thus  the  threat  of  price  cut- 
ting by  the  monopoly  can  paralyze  potential  competition  for 
a  long  period  following  a  price-war,  as  has  often  been  shown 
by  experience.  The  price-war  policy  should  not  be  mistaken, 
as  it  often  is,  for  typical  competition,  where  the  motive  is  to 
sell  at  a  profit,  however  meager.  The  price-war  policy  is 
only  undertaken  to  force  a  competitor  to  an  agreement  either 
to  withdraw  from  the  territory,  or  to  maintain  a  higher  scale 
of  prices,  or  to  sell  out  his  business,  etc.  Usually  selling  at 
less  than  cost  for  a  time  is  deliberately  done  with  the  purpose 
of  selling  at  more  than  a  normal  profit  later. 

§  6.  Problem  of  the  economy  of  large  production.  Size 
of  the  enterprise  is  a  condition  affecting  unit  cost  in  most  im- 
portant ways.  There  are  in  many  cases  advantages  in  large 
production;  there  are  economies  in  large  plants.^  "We  have 
already  studied  the  principle  of  proportionality  (Chapter 
12)  and  have  seen  how  the  proper  proportion  of  the  various 
factors  to  each  other  within  the  enterprise  must  be  main- 
tained. But  further,  the  industry  as  a  whole  may  be  in  better 
or  worse  proportion  to  the  outside  conditions,  to  the  size  of 
the  market  which  it  has  a  chance  to  supply.  There  is  here  a 
problem  of  the  most  economic  size  for  an  enterprise.  As  the 
size  of  the  whole  enterprise  grows,  the  various  parts  (factors 
and  costs)  of  it  must  grow  in  some  proportion,  but  not  in 
precisely  the  same  proportion.  Some  parts  do  not  need  to 
increase  proportionally  to  the  output  of  the  plant,  and  herein 
lies  the  economy.  The  advantages  of  large  production  should 
not  be  assumed  to  be  necessarily  conditioned  on  monopoly 
control,  even  where  monopoly  is  the  only  condition  in  which 
it  seems  that  a  large  enough  unit  of  enterprise  can  be  secured 
to  get  the  full  economies  of  large  production.    In  such  cases 

8  This  often  is  spoken  of  as  the  "law  of  increasing  returns,"  especially 
in  manufacturing,  and  it  is  contrasted  with  the  principle  of  diminishing 
returns  which  was  believed  to  be  peculiar  to  agriculture.  This  is  an  er- 
roneous contrast.     See  note  at  end  of  eh.  34. 


Cn.  31]         MONOPOLY-PRICES;  LARGE  PRODUCTION  389 

the  two  problems  coexist,  but  must  be  kept  logically  distinct 
if  confusion  is  to  be  avoided. 

§  7.  Economy  of  labor  in  large  production.  The  econ- 
omy of  large  production  is  a  particular  case  of  the  advantages 
of  division  of  labor,  and  we  need  consider  only  a  few  of  the 
features  peculiar  to  it.  There  are  certain  technical  advan- 
tages that  are  possible  only  by  physical  concentration;  that 
is,  by  producing  a  large  output  in  a  single  plant  at  one  place. 
This  makes  possible  the  subdivision  of  tasks  among  a  large 
number  of  men  so  that  specialization  of  trades  is  carried  to 
the  furthest  possible  point  of  advantage.  Each  worker  can 
become  skilful  at  his  work  in  less  time,  having  but  one  thing 
to  do,  lower  paid  workers  can  be  used  on  many  parts  of  the 
work,  and  less  time  is  lost  in  changing  from  one  thing  to 
another.  Division  of  labor  decreases  in  some  ways  the  dif- 
ficulty of  supervision  in  larger  factories,  where  the  processes 
are  divided,  systematized,  and  made  a  matter  of  routine.  The 
necessary  inspection  of  the  results  is  more  rapid  and  easy. 
The  lower  cost  of  labor  per  unit  of  product  in  a  large  group 
as  compared  with  a  small  group  is  especially  noticeable  in 
producing  form-value.  In  certain  cases  it  appeared  that  in 
making  plows  nine  men  working  separately  could  average  66 
plows  each  per  year,  while  one  hundred  and  eighty  men 
working  together  will  average  110  each  per  year,  the  output 
per  man  being  increased  66%  per  cent.  In  a  rifle-factory 
with  a  daily  output  of  one  thousand,  three  men  could  turn 
out  the  same  product  that  required  eight  men  in  a  factory 
with  a  daily  output  of  fifty,  an  increase  per  man  of  166% 
per  cent. 

§  8.  Economical  use  of  machinery  in  large  production. 
In  these  examples  the  saving  in  labor  is  not  merely  the  result 
of  increased  personal  skill,  but  of  the  use  of  machinery. 
There  is  economy  in  the  use  of  machinery  partly  because  with 
a  large  output  more  complex,  more  nearly  automatic,  ma- 
chinery can  be  used.  Even  when  the  same  kinds  of  machines 
are  used  they  can  be  kept  specially  adjusted  for  each  pat- 


390  ENTERPRISE  AND  PROFIT  [Pt.  V 

tern  and  process,  whereas  in  a  small  factory  much  time  and 
energy  are  wasted  in  adjusting  one  machine  for  various  proc- 
esses. The  machinery  in  a  large  factory  is  thus  better  and 
more  fully  utilized.  A  comparison  has  been  made  of  the 
machinery  that  would  be  used  in  one  large  ax-factory  and  in 
twenty-five  small  ax-factories  having,  it  is  assumed,  the  same 
number  of  workmen  and  the  same  total  output,  as  follows : 

Twenty-five  One  large                     Saving 

small  factories  factory  Number         Per  cent 

Shears    25  3                    22                    88 

Triphammers    100  20                    80                    80 

Grindstone  pits   50  37                    13                    26 

Polishing   frames    50  30                    20                    40 

Total  machines    225  90  135  60 

The  difference  in  cost  due  to  machinery  is  not  so  great  as  these 
figures  indicate,  as  the  unused  machine  lasts  longer;  but  in 
the  small  factory  there  is  more  depreciation  from  rust  and 
decay,  and  a  larger  investment  of  capital  for  each  unit  of 
product.  The  average  amount  of  stock  and  materials  required 
in  a  small  factory  is  greater  in  proportion  to  the  output. 

The  cost  of  producing  steam  power  is  usually  less  per  horse 
power  in  a  large  plant,  because  of  automatic  devices  for  un- 
loading and  handling  coal  and  ashes,  and  because  of  greater 
efficiency  of  larger  boilers  and  engines,  etc.  The  use  of  power 
is,  by  the  law  of  averages,  distributed  more  evenly  in  a  large 
plant  than  in  a  small  one.  Water  power  in  some  places  may 
be  developed  at  low  cost  per  unit  for  a  very  large  plant,  by 
construction  of  large  reservoirs,  etc.,  where  the  cost  would  be 
prohibitive  in  a  small  plant. 

§  9.  Economy  of  buying  and  selling  in  large  quantities. 
Materials  can  be  more  exactly  standardized  as  to  quality  when 
bought  regularly  and  in  larger  amounts,  and  in  many  cases 
more  cheaply.  Shipments  in  carload  and  trainload  and  ship- 
load lots  make  freight  rates  per  unit  less  for  large  amounts 
even  without  illegal  concessions. 

The  cost  per  unit  of  selling  the  product  in  many  cases  be- 


Ch.  31]         MONOPOLY-PRICES;  LARGE  PRODUCTION  391 

comes  less  as  the  output  increases.  Advertising  to  make  a 
name  "a,  household  term"  would  be  ruinous  for  a  small  en- 
terprise, hut  becomes  a  minute  item  of  unit  cost  when  divided 
by  a  multitude  of  sales.  Often  more  orders  come  unsolicited 
as  a  business  grows.  A  larger  organization  of  commercial 
travelers,  carrying  a  larger  line  of  goods,  and  each  covering 
a  smaller  territory  more  thoroly,  makes  the  unit  selling  cost 
lower. 

§  10.  Certain  limitations  of  large  production.  Not  one 
of  these  advantages  is  absolute  and  unlimited,  and  for  most  of 
them  there  are  offsetting  disadvantages  which  at  length  put 
an  end  to  the  economy  of  size.  Labor  can  not  be  indefinitely 
divided,  and  when  the  factory  is  large  enough  to  keep  running 
one  each  of  the  best  machines  known,  there  is  little  or  no 
economy  in  duplicating  machines.  As  the  factory  grows  the 
head  manager  can  have  less  and  less  complete  oversight;  the 
eye  of  the  master  can  not  be  over  all  as  in  the  smaller  establish- 
ment. This  defect  soon  proves  disastrous  unless  mended  by 
more  elaborate  methods  of  organization,  reporting,  records, 
bookkeeping,  etc.,  and  the  best  of  these  prove  expensive.  In 
a  small  perfectly  equipped  factory  making  a  patented  spe- 
cialty, and  employing  about  one  hundred  men  all  of  whom  are 
personally  known  to  the  executive,  the  oflSce  "overhead"  is 
only  about  5  per  cent;  whereas  in  very  large  factories  this 
item  sometimes  amounts  to  20  per  cent. 

The  cost  of  transmitting  steam  power  by  shafts  and  pulleys 
puts  a  limit  to  the  economy  of  large  steam  power ;  and  in  many 
locations  electric  power  is  or  can  be  supplied  as  cheaply  to 
the  small  factory  as  to  the  large  one.  The  natural  limit  of 
water  power  sometimes  gives  a  maximum  of  power  economy 
to  a  factory  while  it  is  small,  and  as  it  grows  additional  power 
from  coal  costs  more  per  horse  power.  As  large  factories 
tend  to  create  cities  around  them,  land  rises  in  value  and 
higher  wages  must  be  paid  the  workmen  in  large  cities.  Small 
factories  are  constantly  seeking  out  lower  rents,  taxes,  wages, 
salaries,  cheaper  local  sources  of  materials,  cheap  tho  lim- 


392  ENTERPRISE  AND  PROFIT  [Px.  V 

ited  sources  of  power,  and  thus  they  compete  successfully  in 
many  markets. 

§  11.  Certain  disadvantages  of  large  buying  and  selling. 
In  many  cases  growth  in  size  is  in  some  respects  a  disadvan- 
tage both  in  buying  and  m  selling.  To  serve  a  local  market  a 
small  establishment  has  certain  advantages  which  no  large 
competitor  can  equal.  A  factory  using  materials  found  in  the 
locality,  as  lumber  for  wagons  and  furniture,  wheat  for  flour, 
etc.,  has  an  advantage  in  costs  by  saving  of  freights  and  the 
cost  of  this  item  increases  with  the  output.  In  selling,  like- 
wise, the  nearest  market  is  partially  a  protected  field,  to  which 
distant  competitors  can  come  only  at  greater  cost.  It  costs 
more  to  send  agents  further,  and  either  prices  must  be  re- 
duced or  freights  paid  by  the  seller,  and  this  cost  of  over- 
coming the  limits  of  the  market  finally  must  offset  all  the 
other  advantages  of  large  industry.  These  facts  help  to  ex- 
plain the  survival  and  modest  success  of  many  thousands  of 
retail  stores,  most  notably  grocery  and  drug  stores,  and  of 
small  factories  such  as  grist  mills,  lumber  and  planing  mills, 
wagon  and  furniture  factories,  fruit  canneries,  and  thousands 
of  small  local  shops  for  repairs  and  local  orders  in  all  the 
various  crafts,  working  in  gold,  silver,  iron,  tin,  wood,  leather, 
etc.  Further,  it  may  be  observed  that  the  advantages  of  size 
are  greatest  where  the  production  is  the  multiplication  of  a 
few  patterns,  most  fully  standardized ;  small  production  holds 
its  place  most  successfully  where  there  is  need  of  individu- 
ality, variety,  art,  personal  attention  to  the  consumer 's  wishes, 
and  prompt  service  that  can  be  rendered  only  in  a  narrow 
neighborhood. 

It  is  evident  that  most  of  these  limitations  to  growth  apply 
to  a  single  local  factory  as  regards  its  internal  economies,  but 
do  not  apply  fully  to  the  buying  and  selling  of  a  combination 
under  one  management  of  geographically  scattered  plants. 
The  federative  plan  has  thus  been  applied  to  the  "chain 
store"  of  various  kinds — groceries,  drugs,  tobacco,  shoes, 
clothing,  five  and  ten  cent,  general  department.    It  has  been 


Ch.31]         MONOPOLY-PRICES;  LARGE  PRODUCTION 


393 


applied  to  manufacturing  on  an  enormous  scale  in  such  cor- 
porations as  the  U.  S.  Steel  Corporation.  These  enterprises 
often,  but  not  always,  contain  an  element  of  monopoly.  There 
are  also  cases  where  the  necessary  size  for  minimum  cost  is 
dependent  on  the  existence  of  a  condition  of  monopoly,  as  in 
most  so-called  "public  utilities."* 

§  12.    Large  production  and  the  two  types  of  prices.    If 
there  is  a  situation  where  two  or  more  establishments  are  able 


Fig.  51.  Areas  of  Small  and  of  Laege  Production. 
Each  circle  represents  schematically  an  entire  country,  divided  into 
markets,  or  regions  of  influence,  each  supplied  by  one  establishment. 
At  first  it  would  appear  as  in  the  circle  at  the  left,  but  after  concentra- 
tion had  gone  on  to  a  large  degree,  the  whole  territory  might  be  con- 
trolled almost  entirely  by  a  few  large  concerns  such  as  A,  B,  C,  and  D 
A  factory  located  at  B,  for  example,  would  market  its  product  in  all 
directions  (as  shown  by  the  small  lines  leading  out  from  B)  until  it 
came  into  contact  with  the  competition  of  A,  C,  and  D.  The  limits  of 
influence  would  be  determined  mainly  by  navigable  rivers,  railroads, 
supplies  of  natural  materials,  distribution  of  population,  etc.,  but  also 
by  various  psychic  influences,  such  as  habit,  personal  acquaintance,  etc. 

steadily  to  decrease  unit  costs  by  the  economy  of  size,  and 
there  is  normal  competition  among  them,  the  result  should  be 
a  decrease  of  price.  "When  furniture  is  made  in  small  shops, 
where  most  of  the  work  is  done  with  hand  tools,  the  radius 
and  area  of  the  market  are  small ;  the  improvement  of  trans- 
portation widens  the  markets  and  makes  possible  large  pro- 
duction with  its  economies.  These  two  conditions  might  be 
represented  in  a  map,  or  ground-plan,  as  in  Figure  51. 

4  The  discussion  of  these  cases  must  be  left  until  the  treatment  of  the 
trust  problem. 


dd4 


teNTfiRPRlSE  AND  PROFIT 


[Pt.  V 


4.- 


Profit 


Rad4us  of 
Market 


Fig.  52. 


ftadius  of 
Market 

Peopits  with  F.  O.  B. 
Prices.* 


Prices  both  in  the  small  and 
the  large  market  may  vary  ac- 
cording to  two  main  principles 
shown  in  Figures  52-55.  (1) 
The  prices  may  be  uniform  to 
every  one  at  the  factory,  or  at 
the  nearest  railroad  station. 
Such  a  pric6  is  called  f.o.b.  (free 
on  board,  i.e.,  of  the  cars),  the 
buyer  having  to  pay  the  freight  (Figure  52).  The  price  to 
the  various  buyers'  doors  varies  throughout  the  territory 
in  accordance  with  the  differences  in  freights,  and  at  the 
outer  edge  of  each  area  the  advantage  of  buying  in  one 
market  or  the  other  falls  to  zero.  The  cost  is  reckoned  by 
the  maker  to  be  uniform  on  all  the  output  and  each  factory 
has  by  this  rule  what  appears  to  be  its  natural,  or  normal 
territory.  (2)  The  prices  may  be  uniform  to  all  buyers  for 
goods  delivered  within  specified  areas  (Figure  53) ;  as  one 
manufacturer  of  scales  at  Binghamton,  N.  Y.,  advertised 
widely  for  many  years,  "Jones  pays  the  freight."  Here  the 
different  units  of  products  contribute  unequally  to  profits, 
and  the  market  extends  to  the  point  where  price  will  cover 
variable  costs  and  little  more. 

§  13.  Monopoly  element  in  price- 
fixing.  These  two  principles  of 
price-fixing  may  be  combined  in  va- 
rious proportions,  and  especially  in 
the  ease  of  goods  not  sold  at  an  ad- 
vertised price,  but  by  agents,  there 
is  a  strong  temptation  to  depart  from 
the  f.o.b.  price,  not  regularly  but  as 

•  This  shows  a  cross  section  of  prices  to  buyers  at  each  point  along 
the  diameter  of  the  market  supplied  from  the  factory  at  the  middle. 
The  next  figure  (53)  is  on  the  same  plan,  with  the  factory  at  the  middle; 
but  in  the  two  following  figures  (54  and  55)  the  factories  A  and  B  re- 
spectively are  at  the  edges  of  the  figures,  and  only  the  radii  of  their 
markets  are  shown. 


7 

e- 

Unifbrm    Price  To  Buyers 

FneigMr^<^^s 

^^^£^9H«- 

*  - 

1 

■5  - 

.2  - 

1  - 

h ; 1 i *1 

Markei'  Market 

Fig.     53.     Profits    with 
"Price    Delivered." 


CH.31]         MONOPOLY-PRICES;  LARGE  PRODUCTION 


395 


appears  necessary  to  ef- 
fect a  sale.  Factory  B  (in 
Figure  54)  may  maintain 
the  f.o.b.  price  within  its 
own  natural  territory,  and 
cut  prices  so  as  to  invade 
the  rival's  territory.  If 
this  is  successful  it  may  so 
limit  the  output  of  rival  A, 


Radius  oC  morKer 


^  Padius  c/  * 
marKeT 

as  to  raise  the  average  cost  ^iq    54    profits  with  prices  partly 

/-n.  cr\        mi,       ^;-q^«  F.    O.    B.    AND    Partly    Delivered. 

(Figure    55).     The    wider 

the  territory  over  which  a  factory  gets  a  market  the  greater 
its  degree  of  monopoly  control  in  the  inner  portions  of  its 
own  territory.  Instead  of  making  its  own  costs  a  basis  of 
price,  it  may  make  its  smaller  competitors'  costs  the  standard. 
Establishment  A's  uniform  price  f.o.b.  plus  freight  to  destina- 
tion is  shown  (Figure  55)  on  line  ab.  If  B  just  meets  these 
prices,  a  gross  profit  shown  at  be  would  be  possible  at  the 
center  of  its  territory,  falling  to  zero  at  d.  Under  such  con- 
ditions the  price  in  a  large  portion  of  the  territory  of  large 
production  would  be  much  higher  than  before  with  smaller 
production,  and  the  large  profit  would  offer  a  motive  to  some 

one  to  start  a  small  fac- 
tory, even  if  its  costs 
would  be  higher  per  unit 
than  those  of  B.  But  the 
fear,  the  certainty,  that 
prices  would  be  reduced 
could,  after  a  few  lessons, 
effectually  prevent  such 
an  extra-hazardous  invest- 
ment. 

This  conquest  of  the  market  by  one  establishment  can 
hardly  happen  in  as  simple  and  complete  a  way  as  that  sup- 
posed. The  competitor  can  play  at  the  same  game,  and  even 
tho  smaller  (as  A  in  Figure  55)  would  struggle  with  like  price- 


Radios  of  Rodibs  of  morhet 

marheT 
Fig.  55.     Local  Discrimination  Complete. 


S0d  ENTERPRISE  AND  PROFIT  [Pt.V 

tactics  to  retain  or  recover  the  border  territory  (that  be- 
tween d  and  e).  Then  the  competitors  are  not  always  di- 
vided territorially.  Smaller  factories  exist  alongside  of 
larger  ones  in  districts  well  suited  to  the  kind  of  industry 
(iron,  textiles,  woodworking,  etc.),  and  maintain  their  exist- 
ence by  serving  special  classes  of  customers  in  a  special  way. 
They  are  latent  competitors  for  related  lines  of  business  in 
case  prices  are  raised  much  above  those  yielding  usual  profits. 
For  most  kinds  of  goods  some  substitutes,  or  some  other  source 
of  supply,  can  be  had,  if  prices  are  greatly  raised  by  monop- 
oly power.  With  all  these  limitations,  however,  there  still 
remains  a  considerable  measure  of  monopoly  power  in  many 
cases,  and  a  wide  range  of  apparent  caprice  in  prices.  Any 
one  of  the  large  competitors  by  a  change  in  his  policy  may 
greatly  alter  the  price  situation  in  a  certain  territory,  intro- 
duce a  period  of  what  may  be  called  abnormal  competition 
and  abnormally  low  prices,  and  bring  upon  himself  and  others 
either  loss  or  an  increased  monopoly  power.  In  either  case 
there  is  a  return  to  higher  prices  later.  The  search  for  a 
prevention  of  this  irregularity  constitutes  the  large  part  of 
the  practical  problem  of  monopoly. 


PART  VI 
DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY 


CHAPTER  32 
THE  PEOBLEM  OF  POPULATION 

§1.  Introduction:  static  and  dynamic  problems  of  economics.  §  2. 
A  static  economy.  §  3.  Dynamics  and  the  social  point  of  view.  §  4. 
Rhytlimic  change  and  cumulative  change.  §  5.  Some  forces  making  for 
change.  §  6.  Population-change  as  a  dynamic  force.  §  7.  The  Malthu- 
sian  doctrine.  §  8.  Tendency  versus  actuality.  §  9.  Food  limit  versus 
moral  restraint.  §  10.  Inadequate  recognition  of  psychic  factors.  §  11. 
The  overplus  of  blossom.  §  12.  Limit  of  the  food  supply.  §  13.  Eater 
and  eaten.  §  14.  Features  of  the  biologic  stage.  §  15.  Primitive  popu- 
lations in  the  biologic  stage.     §  16.  War  and  the  pressure  of  population. 

§  1.  Introduction :  static  and  d3mamic  problems  of  eco- 
nomics. We  have  now  to  shift  our  point  of  view  from  that 
we  have  held  thus  far  and,  in  concluding  this  volume,  we  are 
to  survey  our  subject  more  broadly  and  with  a  somewhat  dif- 
ferent purpose.  Our  study  of  value  began  with  individual 
choice  and  we  have  followed  this  process  of  individual  choice 
in  its  manifold  workings  in  the  various  problems  of  value  and 
price.  Men  in  their  economic  affairs  are  never  absolutely  at 
rest  either  in  mind  or  in  body.  (See  Chapter  4,  especially 
section  6  on  changes  of  desires  and  of  valuations.)  Desires 
wax  and  wane  every  day,  and  each  day  goods  for  daily  exist- 
ence and  gratification  must  be  secured  through  the  labor  and 
wealth  of  the  community,  even  in  the  most  unchanging  form 
of  society.  Each  individual  is  seeking  to  find  the  best  adjust- 
ment for  himself — a  never-ending  process.  If  for  a  moment 
(and  in  so  far  as)  this  is  attained,  there  results  an  equilib- 
rium for  each  individual,  where  he  has  no  motive  to  change. 

This  process  of  the  individual's  adjustment  is  a  part  of  a 

399 


400  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Pt.VI 

larger  adjustment ;  his  change  goes  on  within  a  larger  process 
of  change,  that  of  society  as  a  whole.  There  is  a  real  need, 
however,  to  distinguish  in  many  economic  problems  between 
that  play  of  individual  motives  and  forces  which  merely  re- 
sults in  maintaining  a  status  quo,  and  that  which  transforms 
the  whole  society  into,  or  carries  it  to,  a  different  condition. 
The  one  is  a  static  adjustment,  the  other  a  dynamic  adjust- 
ment, or  process.  To  draw  an  analogy:  the  human  body 
between  about  the  ages  of  twenty  and  forty  is  constantly 
renewing  itself,  is  the  seat  of  ceaseless  processes,  yet  is  com- 
paratively static,  is  changing  only  slowly.  Earlier  was  the 
dynamic  period  of  childhood's  growth,  and  later  will  be  that 
of  age's  decline.  So  an  economy  may  through  long  periods 
show  slight  changes,  and  again,  rapid  changes  either  upward 
or  downward  in  respect  to  any  feature. 

Where  the  whole  economic  situation  is  one  of  balanced 
forces,  giving  a  comparatively  stable  adjustment  of  labor  and 
wealth,  and  of  prices,  it  is  a  static  situation.  And  an  eco- 
nomic society  where  this  stable  condition  is  normal  is  a  static 
economy.^ 

§  2.  A  static  economy.  Let  us  form  a  picture  of  a  static 
economy.  The  number  of  persons  is  unchanged  from  genera- 
tion to  generation.  Each  year  the  number  of  births  is  just 
balanced  by  the  number  of  deaths.  The  average  natural  abil- 
ity of  the  new  born  must  be  just  equal  to  that  of  the  deceased, 
and  that  this  should  be  so,  either  there  must  be  no  differences 
whatever  in  the  natural  ability  of  the  families,  or  each  class 
and  family  of  the  population  must  contribute  in  the  same 
ratio  to  the  number  of  surviving  children.  The  industrial 
education  and  training  of  each  oncoming  generation  is  the 
same  as  that  of  the  last,  and  this  extends  to  every  faculty  of 
the  mind  and  habit  of  life  that  affects  thrift,  industry,  and 
choice  of  goods.  Minor  variations  in  particular  families 
might  offset  each  other  and  maintain  an  unchanged  average. 
The  population  of  a  static  economy  is  in  quantity  and  qual- 

1  See  note  on  Definitions  at  end  of  chapter. 


Ch.  32]  THE  PROBLEM  OF  POPULATION  401 

ity  like  a  reservoir  of  water  fed  by  a  pipe  at  an  even  rate  and 
having  an  outlet  of  just  the  same  capacity,  so  that  the  level 
and  quality  remain  unaltered. 

In  a  static  economy  the  production  of  goods  from  year  to 
year  is  the  same  in  kind,  quality,  and  quantity.  Seasonal 
changes  within  the  year  cause  many  values  to  move  up  and 
down,  but  such  changes  as  this — each  year  the  same  and  com- 
pleting their  cycle  within  the  year — are  accounted  a  mark  of 
a  static  rather  than  of  a  dynamic  economy. 

The  area  of  land  as  well  as  the  kinds  of  resources  and  the 
ease  with  which  they  are  obtained,  are  unchanging.  This 
means  that  they  are  used  in  an  absolutely  durative  manner. 
Technic  is  stationary ;  the  same  kinds  of  tools,  processes,  and 
methods  pass  from  father  to  son.  Abstinence  is  solely  of  the 
conservative  kind.  Under  these  conditions  the  ''normal" 
equilibrium  of  prices  of  commodities,  labor  of  all  sorts,  uses 
of  goods,  capitalization,  and  rate  of  interest  would  be  un- 
changing. Not  that  this  equilibrium  is  maintained  in  a  me- 
chanical, automatic  manner,  in  which  men  have  no  part. 
These  levels  of  values  and  prices  can  be  maintained  only  as  a 
result  of  ceaseless  choices,  bids,  and  efforts  on  the  part  of  all 
the  members  of  the  community.  Men  in  a  static  society,  each 
seeking  to  make  advantageous  choices,  are  just  as  much  active 
factors  in  maintaining  a  level  of  prices  as  are  men  in  a 
highly  dynamic  state.  But  given  the  static  conditions  of 
population,  culture,  resources,  and  technic,  the  subjective  and 
objective  conditions  combine  to  give  a  static  level  of  values. 

Such  a  state  of  human  society  in  this  absolute  degree  never 
has  been  known,  but  it  has  been  more  or  less  approximated  in 
many  times  and  places.  Examples  are  many  primitive  soci- 
eties, such  as  the  Esquimaux,  native  Australians,  etc.,  con- 
tinuing unchanged  for  many  centuries;  ancient  Egypt  and 
medieval  Europe.  Until  the  twentieth  century  China,  indeed 
the  Orient  generally,  has  been  synonymous  with  the  unchange- 
able in  social  and  economic  conditions.  "Better  fifty  years 
of  Europe  than  a  cycle  of  Cathay."    Many  features  of  a 


402  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Pt.VI 

static  society  are  present  everywhere  much  of  the  time.  This 
conception  is  a  type  or  norm  by  which  we  can  study  and  judge 
the  effect  of  each  kind  of  forces  separately,  and  not  as  they 
occur  in  haphazard  combinations. 

§  3.  Dynamics  and  the  social  point  of  view.  Heretofore 
our  study  has  been  purposely  confined  as  far  as  possible  to  the 
static  aspects  of  the  value  and  price  problems.  We  were  bent 
upon  tracing  the  process  by  which  individuals  adjust  their 
funds  of  wealth  and  labor  to  a  general  economic  situation  or 
level  of  valuation  which,  they  find  and  which  they  must  accept 
as  a  fact  given.  We  have  recognized,  however,  that  the  indi- 
vidual finds  himself  compelled,  again  and  again,  to  adjust  his 
choices  to  a  somewhat  altered  general  situation,  or  in  turn, 
may,  by  his  action  (discovery,  invention,  enterprise)  start 
new  forces  into  motion  which  will  eventually  alter  the  situa- 
tion further.  In  the  foregoing  discussion  of  value  and  price, 
this  distinction  between  static  and  dynamic  forces,  problems, 
principles,  and  societies  has  been  more  than  implied.  We 
have  repeatedly  referred  to  the  more  or  less  general  changes 
as  influencing  the  personal  gains  and  losses  of  individuals, 
and  even  of  whole  classes  of  society.  ( See  Chapter  27,  section 
13,  note.)  But  in  these  references  the  purpose  was  still 
primarily  to  show  the  effects  upon  individual  fortunes.  We 
have  now  to  take  the  larger  view,  and  to  consider  these  changes 
with  reference  to  the  effects  upon  the  whole  body  of  society. 

Any  state  of  economic  forces  may  be  studied  in  relation 
to  value  and  price.  If  the  situation  were  quite  static,  the 
price  of  every  factor  would  be  unchanging.  A  new  cumula- 
tive factor  would  carry  the  level  up  or  down  in  the  period  of 
dynamic  change.  There  it  would  remain  until  other  forces 
again  raised  it  or  lowered  it  to  a  new  level,  permanent  so  far 
as  that  one  force  can  determine  it. 

§  4.  Rhythmic  change  and  cumulative  change.  Into  an 
economy  that  is  characteristically  static,  disturbing  influences 
are  constantly  entering.  Some  of  these  forces  make  a  con- 
siderable temporary  change  which,  however,  is  but  rhythmic. 


Ch.  32]  THE  PROBLEM  OF  POPULATION  403 

as  it  calls  into  operation  counter-forces,  bringing  back  the  old 
level  of  equilibrium.     Other  forces  are  more  lasting. 

Dynamic  problems  in  economics  are  not  always  easily  dis- 
tinguishable from  static  problems;  but  in  most  cases  the  dif- 
ference is  clear.  Changes  may  range  from  very  slight  and 
temporary  departures  from  a  certain  static  equilibrium  to 


f^^^ 

A 

C 

O' 

A 

^,-- 

'a 

^.^ 

% 

SuCC 

'"-- 

— 

B 

- 

Per 

D 

ods 

of 

Time 

D' 

Fig.    56.     Static  and   Dynamic   Levels   and   Changes.* 

*  In  a  completely  static  state  the  level  of  prices  and  incomes  would 
continue  unchanged  throughout  the  successive  periods  of  time,  as  repre- 
sented by  the  line  AAA  which  remains  parallel  with  the  base  line.  The 
dotted  line  B  which  oscillates  above  and  below  A  represents  the  rhythmic 
change.  Line  C  represents  a  transformational  (truly  dynamic)  change 
through  a  period  of  time  to  a  permanently  higher  static  level  of  CC; 
whereas  D  represents  a  transformational  change  and  a  lower  static 
level  DD'. 

those  that  are  relatively  great  and  lasting.  Accordingly,  two 
types  of  dynamic  change  may  be  distinguished.  One  is  the 
rhythmic  change,  the  stato-dynamic  change,  where  the  move- 
ment more  or  less  regularly  oscillates  above  or  below  a  **  nor- 
mal equilibrium";  it  is  cyclical,  in  that  the  change  runs  a 
cycle  above  and  below  the  normal  and  back  to  the  starting 
point.  This  appears,  in  any  brief  period,  to  be  dynamic,  but 
is  merely  rhythmic  when  viewed  over  a  larger  period.  An- 
other type  of  dynamic  change  is  cumulative,  or  transforma- 
tional, or  permanent,  meaning  that  the  forces  at  work  are 
not  such  as  will  of  themselves  generate  resistance  (as  does  a 
swinging  pendulum)  sufficient  to  carry  them  back  to  the 
starting  point. 

§  5.    Some  forces  making  for  change.    With   many   of 
these  changes  there  is  nothing  that  makes  for  permanent  prog- 


404  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Pt.  VI 

ress.  There  is  a  maximum  and  a  minimum  of  prosperity,  but 
the  pendulum  has  a  limited  swing.  There  is  in  a  rhythmi- 
cally dynamic  society  far  more  of  risk  and  uncertainty,  of 
need  and  opportunity  for  judgment,  of  range  for  enterprise 
and  alert  management,  than  in  a  purely  static  state.  None 
of  these  forces  and  influences  change  with  perfect  regularity, 
and  even  when  the  general  average  is  pretty  even  from  one 
cycle  to  the  other,  there  is  an  element  of  the  unpredictable  any 
year  about  the  total  movement  as  well  as  about  the  details. 

Only  a  few  of  the  influences  that  bring  about  rhythmic 
changes  are  mentioned  here.  Political  forces  are  constantly 
changing  and  bring  economic  results.  In  the  past  it  has  been 
almost  proverbial  that  in  each  generation  a  nation  must  have 
a  war,  having  had  just  time  enough  to  recover  from  the  last 
one.  A  vacillating  policy  of  taxation,  of  foreign  trade  and 
tariff  duties,  and  of  economic  legislation  keeps  business  in  a 
constant  process  of  adjustment. 

The  discovery  and  production  of  the  precious  metals,  gold 
and  silver,  follows  always  a  somewhat  irregular  cycle.  There 
result  changes  in  the  supply  of  money  and  in  the  scale  of 
prices.  The  treatment  of  these  particular  questions  is  re- 
served for  a  later  volume,  but  some  other  dynamic  changes 
will  be  here  considered. 

§  6.  Population-change  as  a  dynamic  force.  Every  kind 
of  dynamic  change  involves  a  shift  in  the  ratio  of  the  various 
factors  of  production  in  the  community.  On  one  side  of  this 
ratio  is  always  the  human  factor;  and  the  most  general  and 
far  reaching  of  all  dynamic  problems  is  presented  by  changes 
in  population.  The  effects  of  the  saving  and  conservation 
of  material  goods,  of  waste,  luxury,  and  destruction,  of  multi- 
plying tools  and  machines  and  of  improving  them  in  quality 
by  invention,  all  are  relative  to  the  number  of  people  in  that 
economy.  If  the  number  of  people  increases  in  exactly  the 
same  ratio  as  the  area  of  land  (having  like  qualities)  that  is 
brought  into  use,  as  the  number  of  tools  and  machines,  and  as 
the  whole  economic  equipment,  it  is  as  if  no  change  took 


Ch.  32]  THE  PROBLEM  OF  POPULATION  405 

place.  But  if  any  one  of  these  factors  moves  faster  or  slower 
than  any  one  of  the  other,  or  if  other  changes  occur  of  a 
moral,  political,  or  educational  nature  affecting  the  capacity, 
efficiency,  and  habits  of  choice  of  men,  then  the  static  equilib- 
rium is  disturbed.  A  new  normal  equilibrium  is  involved  in 
every  new  setting  of  the  population  in  its  economic  environ- 
ment. Some  of  these  changes  may  involve  little  more  than 
a  substitution  of  one  material  agent  for  another,  such  as  elec- 
tricity for  steam,  or  cement  for  lumber ;  some  of  these  changes 
affect  the  relative  positions  of  various  individuals  without 
altering  much  the  general  or  average  level  of  income ;  but  all 
of  them  involve  more  or  less  a  shift  in  the  general  level  of 
welfare,  the  most  important  economic  change  in  the  eyes  of 
the  social  student. 

"We  shall  therefore  take  up  first  the  problem  of  popula- 
tion, and  ask  what  are  the  effects  of  a  change  in  the  number 
of  people  in  and  of  itself,  other  things  remaining  equal. 
Then  we  shall  consider  what  are  the  effects  of  changes  in  the 
objective  factors,  the  area  of  land,  its  fertility,  the  discovery, 
use,  and  using  up  of  natural  resources,  and  the  invention  and 
increase  of  machinery.  Finally  we  shall  consider  the  sub- 
jective factor,  human  nature,  in  the  use,  saving,  and  accumu- 
lation of  wealth. 

§  7.  The  Malthusian  doctrine.  The  subject  of  popula- 
tion was  brought  into  prominence  in  economic  discussion  by 
the  writings  of  Malthus.^  Before  that  some  thoughtful  com- 
ments had  been  made  here  and  there,  but  it  had  been  gener- 
ally assumed  that  the  larger  the  population  the  better  for  the 
country.  Malthus,  an  interested  student  of  contemporary 
projects  of  social  improvement,  was  struck  by  the  significance 
of  some  facts  of  observation  and  of  history,  and  arrived  quickly 
at  the  conclusion  that  the  excessive  growth  of  population  is 
the  cause  of  much  of  the  misery  and  poverty  in  the  world. 

2  An  essay  on  the  principle  of  population,  as  it  affects  the  future 
improvement  of  society,  by  Thomas  Robert  Malthus,  London,  1798. 
Second  edition,   1803. 


406  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Pt.  VI 

He  believed  also  that  this  excessive  increase  would  be  sure  to 
occur  in  a  state  of  communism,  and  would  alone  be  sufficient 
to  wreck  the  ideal  societies  which  the  reformers  of  that  period 
of  the  French  Kevolution  were  fond  of  picturing. 

This  was  the  general  idea,  but  in  ^ome  respects  the  thought 
was  hazy  and  there  is  even  yet  room  for  discussion  as  to  just 
what  the  Malthusian  "principle  of  population"  is.  Some 
think  it  is  expressed  in  the  proportion  of  the  opposing  ratios ; 
population  has  a  tendency  to  increase  in  a  geometrical  ratio, 
and  food  in  an  arithmetical  ratio.  Thus,  says  Malthus,  while 
food  increases  1,  2,  3,  4,  5,  6,  etc.,  population  increases  1,  2, 
4,  8,  16,  32,  etc.  This  was  the  thought  of  Malthus :  that  popu- 
lation was  always  "pressing  upon"  the  means  of  subsistence, 
and  keeping  large  numbers  on  the  verge  of  want. 

§  8.  Tendency  versus  actuality.  "Tendency"  of  popula- 
tion does  not  mean  here  an  actual  movement,  for  self -evidently 
population  could  not  increase  in  such  a  ratio,  for  each  individ- 
ual mouth  must  have  additional  food.  When  population  has 
reached  2  its  rate  must  slacken,  for  one  fourth  of  the  total 
population  in  the  next  period  would  starve,  or,  distributing 
the  food  evenly,  all  would  have  to  live  on  an  even  scantier 
diet,  until  pestilence,  the  effect  of  want,  reduced  the  numbers. 
* '  Tendency ' '  in  respect  to  population  meant  late^it  possibility 
of  the  population  reproducing  and  multiplying  itself  pro- 
vided food  increase  kept  pace;  tendency  in  respect  to  food 
meant  actual  possibilities  of  the  food  being  increased  by  the 
additional  hands  working  on  the  same  area  of  land. 

Bearing  in  mind  this  ambiguity  the  principle  may  be  ex- 
pressed apart  from  the  two  ratios  as  follows.  Popula- 
tion has  a  tendency  to  outstrip  means  of  subsistence,  with  the 
result  of  poverty,  misery,  and  famine.  Tendency  here  if 
carefully  examined  is  seen  to  be  a  very  complex  idea,  neither 
a  simple  force,  nor  an  actual  increase  of  numbers,  but  a  com- 
bination of  the  physiological  maximum  of  birth  rate,  of  the 
natural  unlimited  philoprogenitive  impulse,  and  of  adequate 
care  and  sustenance  to  rear  the  enormous  number  of  children 


Ch.  32]  THE  PROBLEM  OF  POPULATION  407 

that  would  be  bom  under  these  supposed  conditions.  But 
there  can  not  be  food  enough,  hence  misery  and  death. 
* '  Tendency ' '  is  what  would  happen  if  there  were  food  enough, 
but  in  reality  population  can  not  increase  beyond  2,  the  limit 
of  the  food  supply.  Likewise,  in  reality,  the  food  can  not 
increase  beyond  2,  for  the  increase  of  food  from  2  to  3  is 
merely  what  would  happen  if  twice  as  many  hands  could  be 
put  to  work  upon  the  same  area,  as  in  fact  they  can  not  be. 
Hence  it  is  implied  in  the  argument  of  Malthus  (tho  he  does 
not  clearly  express  it)  that  there  is  in  any  country  a  natural 
point  of  equilibrium  between  population  and  food  which  in 
the  figures  he  has  chosen  as  illustrations  must  be  at  2  and  2. 
Evidently  the  food  supply  depends  upon  the  stage  of  the  arts 
of  food  production.  As  society  changes  from  hunting  to  agri- 
culture, from  hand  culture  to  plowing,  etc.,  the  food  possible 
on  the  same  area  with  the  same  labor  increases,  but  population 
would  quickly  increase  to  this  new  equilibrium,  of  3,  3,  or  4, 
4,  etc.  Population  can  not  actually  increase  much  beyond  that 
point,  for  disease  and  other  ills  will  then  set  in  and  again 
reduce  the  numbers. 

Hence  in  Malthus'  view  the  law  of  population,  expressing 
the  relation  of  the  number  of  people  to  the  actual  food,  is 
essentially  rhythmically  static.  Population  moves  in  cycles 
up  to  and  slightly  beyond  the  quantity  of  food  it  can 
produce,  then  is  cut  down  by  some  catastrophe,  and  again 
slowly  rises  to  the  former  equilibrium.  Any  margin,  or  sur- 
plus of  food  production  made  possible  by  a  cumulative  dy- 
namic force  changes  the  normal  static  level  around  which 
'  population  thereafter  oscillates.  Malthus  shows  by  many  his- 
torical examples  how  again  and  again  war,  or  the  chance 
failure  of  crops,  or  pestilence  has  greatly  reduced  the  popu- 
lation of  a  country,  and  how  almost  invariably  this  loss  has 
been  made  up  by  a  rapid  increase  in  numbers  in  a  single 
generation  up  to  the  limit  of  the  food  supply,  followed  by 
another  period  of  stationary  numbers. 

§  9.    Food  limit  versus  moral  restraint.     Another  notion 


408  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Pt.  VI 

very  unclearly  expressed  and  doubtless  very  cloudy  in  the 
mind  of  Malthus  was  the  nature  of  this  limit  of  the  food  sup- 
ply. He  assumes  that  there  is  such  a  limit  at  each  time  and 
country,  but  nowhere  carefully  analyzes  the  idea.  He  vaguely 
implies  that  it  is  all  the  food  that  the  people  can  get,  and  his 
principle  of  population  usually  has  a  materialistic,  a  fatalistic 
character,  with  its  picture  of  a  limited  food  supply  predeter- 
mined, in  a  way  not  quite  clear,  by  forces  outside  of  the  choice 
and  control  of  men,  and  setting  the  subsistence  limit  to  the 
total  population. 

Yet  in  making  his  main  argument  against  communism  he 
shows  that  at  least  those  families  with  private  property  do  not 
put  their  whole  incomes  into  food,  but  keep  their  numbers 
down,  and  direct  toward  other  things  than  food  a  large  part 
of  the  agents  they  control.  This  choice,  or  quality  of  mind, 
is  recognized  in  the  first  edition  of  the  essay  and  in  the  second 
edition  is  named  moral  restraint.  A  psychological  factor 
enters  here  to  take  a  place  alongside  of  the  materialistic  fac- 
tor, and  the  two  never  are  reconciled  by  Malthus.  Moral  re- 
straint, Malthus  seems  to  think,  is  limited  to  a  small  section 
of  the  population,  does  not  act  upon  the  masses,  and  plays 
no  appreciable  part  in  explaining  the  total  population  of  the 
country.  He  still  thinks  of  population  on  the  whole  as  regu- 
lated by  the  food  supply.  Yet  Malthus  does  not  think  it  use- 
less to  advise  the  working  classes  for  their  own  welfare  to 
postpone  marriage  and  thus  limit  the  size  of  their  families. 
This  notion  became  the  starting  point  for  the  propaganda 
called  neo-Malthusianism  (which  has  advocated  proposals  very 
different  from  that  of  Malthus)  to  prevent  very  large  fam- 
ilies among  the  working  classes. 

§  10.  Inadequate  recognition  of  psychic  factors.  Indeed 
the  work  of  Malthus  is  replete  with  suggestions  and  with 
keen  observations  of  history,  not  sufficiently  analyzed  or  or- 
ganized, and  often  expressed  in  ambiguous  terms.  The  Mal- 
thusian  doctrine  of  population  has  been  the  center  of  a  con- 
tinuous, and  often  bitter,  controversy  ever  since  its  appear- 


Ch.  32]  THE  PROBLEM  OF  POPULATION  409 

anee,  both  as  matter  of  economic  theory  and  as  to  its  bearing 
upon  radical  social  reforms.  Because  of  the  features  in  it 
we  have  just  noted  it  is  futile  now  to  line  up  for  or  against 
Malthusianism.  Hardly  any  two  persons  mean  just  the  same 
thing  by  that  term.  We  may  agree  that  Malthus  got  hold  of 
a  great  biological  principle  without  understanding  its  full 
bearings.  Darwin  was  struck  by  this  in  reading  Malthus' 
book,  and  made  it  the  starting  point  of  his  great  doctrine  of 
natural  selection  in  explaining  evolution.  Since  1859,  there- 
fore, we  are  in  a  position  to  see  the  subject  in  much  broader 
perspective.  It  is  best  therefore  to  put  aside  from  our 
thoughts  prejudices  and  controversies  clustering  around  the 
Malthusian  doctrine,  and  to  find  a  basis  for  a  doctrine  of  pop- 
ulation in  the  ideas  of  modern  biology  and  psychology  and  in 
the  statistical  facts  of  our  times. 

§  11.  The  overplus  of  blossom.  A  doctrine  of  population 
is  the  grouping  and  explanation  of  the  various  influences  that 
combine  to  determine  the  number  of  people  in  the  several 
localities  and  in  the  world  as  a  whole.  The  most  fundamental 
fact  in  the  doctrine  of  population  is  the  surplus  of  life  germs. 
In  every  species  of  living  organism,  vegetable  or  animal,  the 
production  of  germ  cells  in  each  generation  is  vastly  greater 
than  the  number  that  develops  into  living  offspring.  Yet  the 
number  of  offspring  born  is  much  greater,  in  most  species 
vastly  greater,  than  would  suffice  to  maintain  the  number  of 
living  individuals  undiminished  if  all  the  young  lived  to  ma- 
turity. Each  species  has  an  average  or  normal  birth  rate, 
great  or  small.  Insects  produce  thousands  of  eggs  each,  fish 
produce  hundreds,  the  rabbit  a  score  of  young  in  a  year,  and 
the  elephant  but  one  in  three  years.  Clearly  there  is  a  gen- 
eral inverse  relation  between  the  intelligent  care  that  the 
parents  of  any  species  give  to  their  offspring,  and  the  number 
of  life  germs  produced.  Nature  economizes  the  forces  of  the 
species  by  a  gradual  reduction  of  the  real  surplus,  but  always 
leaves  what  the  engineers  call  a  ** factor  of  safety."  There 
are  so  many  chances  of  accident,  that  if  the  number  of  germs 


410r  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Pt.  VI 

is  enough  only  in  favorable  conditions,  the  species  will  become 
extinct  under  any  conditions  in  the  least  unfavorable. 

§  12.  Limit  of  the  food  supply.  These  myriads  of  seeds 
seeking  for  a  chance  to  germinate,  these  myriads  of  young  in 
every  species  seeking  to  survive,  can  not  possibly  grow  to 
maturity.  Even  the  slow-breeding  elephant,  with  a  period  of 
gestation  of  three  years,  and  producing  one  calf  at  a  birth, 
would  cover  the  entire  earth  and  leave  no  standing  room  in 
a  few  centuries  if  every  calf  born  could  live  to  maturity.  In 
how  much  briefer  time  would  the  fast-breeding  animals  and 
insects  cover  every  foot  of  the  earth !  The  limit  of  the  food 
supply  alone  would  prevent  this.  This  has  been  demonstrated 
repeatedly  when  herbivorous  animals  have  been  placed  on  an 
island  from  which  they  could  not  escape,  and  where  there 
were  no  large  beasts  of  prey.  This  demonstration  was  made  on 
an  enormous  scale  when  the  rabbit  was  introduced  into  Aus- 
tralia, that  peculiar  and  long  isolated  continent  containing 
none  of  the  rabbit's  ancient  enemies.  The  rabbits  increased 
and  devastated  great  areas,  and  tho  they  have  been  hunted, 
trapped,  and  poisoned  by  the  millions,  and  great  numbers  of 
them  have  died  of  starvation  outside  the  wire  fences  erected  to 
stop  their  progress,  they  still  continue  to  be  a  pest.  If  there 
were  no  other  limit  earlier  interposed,  this  ultimate  limit  of 
the  food  supply  would  quickly  check  the  increase  of  any  form 
of  animal  life. 

§  13.  Eater  and  eaten.  The  destruction  of  one  kind  of 
animal  by  another  limits  numbers  in  another  way.  The  num- 
ber of  lions  is  limited  by  the  number  of  their  prey  in  the 
region  where  they  roam.  The  number  of  deer,  therefore,  is 
limited  in  two  ways,  by  the  amount  of  their  food  and  by  the 
number  of  lions  which  catch  the  deer.  The  more  numerous 
the  lions,  the  fewer  the  deer;  the  fewer  the  deer,  the  greater 
the  supply  of  vegetable  food ;  as  the  pressure  increases  on  one 
side,  it  decreases  on  the  other,  until  an  equilibrium  is  reached. 
Some  carnivorous  animals  will  in  times  of  great  hunger  eat 
the  weaker  members  of  their  own  species,  even  their  own 


Ch.  32]  THE  PROBLEM  OF  POPULATION  4H 

young.  The  actual  limitation  here  is  thus  not  starvation,  but 
violence  induced  by  hunger. 

Geology  tells  the  story  of  a  slow  and  steady  change  that 
has  gone  on  in  the  earth  and  in  the  species  of  animals  that 
inhabit  it.  History  records  some  rapid  changes  due  to  con- 
vulsions of  nature  or  to  interference  by  man  with  the  natural 
conditions.  But  the  usual  condition  is  an  equilibrium  of 
numbers,  long  maintained.  Tho  each  species  of  animal  has  a 
capacity  for  unlimited  multiplication,  throughout  nature  each 
keeps  its  customary  place,  changing  little  despite  its  ef- 
forts to  increase  and  to  crowd  into  the  habitat  of  other 
species. 

§  14.  Features  of  the  biologic  stage.  Every  species  of 
animals  thus  presents  the  problem  of  the  adjustment  of  num- 
bers to  environment.^  Among  wild  animals  this  adjustment 
is  in  the  biologic  or  instinctive  stage,  which  is  characterized 
by  these  features:  (a)  A  physiological  factor,  the  physical 
capability  of  developing  reproductive  cells,  and  of  nourishing 
and  protecting  them  up  to  the  time  that  they  become  separate 
living  beings  through  various  processes  in  the  oviparous  and 
viviparous  animals,  (b)  A  psychological  factor,  the  instinct 
of  reproduction  impelling  to  the  realization  of  this  physio- 
logical factor,  (c)  An  absence  of  any  knowledge  or  under- 
standing of  the  relation  between  the  instinct  and  the  birth  of 
offspring,  and  consequently  the  lack  of  any  attempt  to  re- 
strain or  regulate  the  birth  rate,  (d)  "The  physiological 
maximum  birth  rate,"  being  the  number  of  births  relative  to 
the  number  of  individuals  capable  of  reproduction,  that  re- 
sults from  the  unhindered  operation  of  the  two  prime  factors, 
physiological  and  psychological,  (e)  A  certain  degree  of 
parental  care  after  birth,  normal  to  each  species,  to  help  the 
young  through  the  early  period  of  life,  (f)  The  survival  of 
the  individuals  thereafter  depending  on  their  inherent 
strength,  vigor,  and  habits  of  life  (including  gregariousness 

a  This  is  sometimes  for  convenience  called  the  problem  of  "population," 
altho  this  is  taking  liberties  with  the  derivation  from  populus,  people. 


412  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Pt.  VI 

and  cooperation),  and  on  the  objective  conditions  of  accidents, 
disease,  food  supply,  rivals,  and  enemies. 

§  15.  Primitive  populations  in  the  biologic  stage.  The 
long  life  of  the  human  race  on  this  globe  has  been  spent  al- 
most entirely  in  this  instinctive  stage  of  population.  In  many 
savage  tribes  vrhen  first  visited  by  European  travelers,  the 
physiological  maximum  birth  rate  seems  to  have  been  nearly 
attained.  In  some  tribes  it  was  well  nigh  normal  that  a 
woman  of  forty  years  of  age  had  given  birth  to  twenty  chil- 
dren— ^j^et  those  tribes  had  only  a  stationary  population. 
Every  Esquimau  girl  is  married  in  her  'teens  and  carries  a 
baby  on  her  back  each  summer,  yet  the  population  of  Esqui- 
maux does  not  increase.  To  the  simpler  native  peoples  even 
to-day  the  nature  of  birth  is  a  mystery  (paragraph  (c) 
above).  A  recent  scientific  observer  of  the  Australian  tribes 
found  them  still  in  this  state.  Every  girl  is  married,  and 
every  widow  is  remarried  within  six  weeks  after  the  death 
of  her  husband.  This  is  the  biologic  stage  of  population, 
remarkable  in  that  with  a  maximum  birth  rate  the  total  popu- 
lation is  either  stationary  or  merely  rhythmically  changing. 

Few  human  societies  known  to  us  are  so  primitive  that  they 
have  not  passed  this  stage,  but  many  societies  have  risen  only 
little  above  it.  In  most  savage  tribes,  where  starvation,  dis- 
ease, and  war  are  constantly  at  work,  the  difficult  task  is  to 
maintain  the  population.  The  birth  rate  is  enormous,  but  few 
of  those  born  arrive  at  maturity.  It  would  be  hazardous  to 
tribal  existence  under  these  conditions  to  limit  the  birth  rate. 
The  custom  of  the  adoption  of  captives  from  hostile  tribes 
is  wide-spread,  because  the  efficiency — the  very  survival — 
of  the  tribe  depends  on  keeping  up  its  number  of  warriors. 

§  16.  War  and  the  pressure  of  population.  War  is  the 
normal  condition  of  most  primitive  tribes.  Its  cause  usually 
appears  to  be  standing  feuds  and  ancient  enmities,  but  the 
deeper  and  abiding  economic  cause  is  the  struggle  for  hunt- 
ing grounds,  for  pasturage,  and  for  control  of  natural  re- 
sources.   When  resorting  to  war  as  the  rude  remedy  for  over- 


Ch.  32]  THE  PROBLEM  OF  POPULATION  •      413 

population,  mankind  is  hardly  above  the  animals,  who  fight 
for  food  against  other  species  of  animals  or  against  their  own 
kind.  Hunting,  fishing,  or  pastoral  people,  or  those  in  the 
earlier  stages  of  agriculture,  require  a  large  area  for  a  small 
population.  Distant  excursions  and  frequent  forays,  when 
food  fails,  develop  rival  claims  to  favored  districts,  and  war 
is  the  only  settlement.  Fighting  under  these  conditions  is  an 
activity  of  such  economic  importance  that  much  of  the  energy 
of  the  tribe  must  be  strenuously  given  to  it.  The  ceaseless 
loss  of  life  in  savage  wars  is  almost  incredible  to  modern 
minds.  The  successive  invasions  of  the  Roman  Empire  by  the 
Teutonic  tribes,  and  the  later  inundations  of  medieval  Europe 
by  the  fierce  pastoral  tribes  of  central  Asia,  were  undoubtedly 
due  to  the  increase  of  population  and  the  outgrowing  of 
resources  by  these  barbarian  peoples,  or  to  the  failure  of  their 
food  supplies  because  of  seasonal  or  of  climatic  changes. 

Note 

Definitions.  Statics  (status,  state,  stationary)  is  that  phase  of  a 
science  which  has  to  do  with  an  equilibrium  which  must  result  in  time 
from  the  existing  group  of  forces,  operating  in  imaltered  magnitude. 
Dynamics  (dynamic  force,  movement)  is  that  phase  which  has  to  do 
with  the  changes  in  process  as  the  result  of  new  or  stronger  or  weaker 
forces,  which  are  more  or  less  permanently  unsettling  the  static  equi- 
librium and  are  carrying  the  point  of  normal  equilibrium  itself  to 
higher  or  lower  levels.  The  terms  static  and  dynamic  in  economics, 
therefore,  may  be  applied  to  forces,  prices,  equilibriums,  problems,  situ- 
ations, and  economies  (altho  the  forces  may  meet  with  increasing  re- 
sistance that  at  length  puts  a  limit  to  their  effects,  as  the  resistance  of 
a  spring  balance  checks  the  weight  at  a  certain  point).  The  change 
may  be  either  progressive  or  retrogressive,  and  a  higher  or  a  lower 
level  may  be  reached  and  maintained  until  some  quite  diflFerent  force 
coming  from  another  direction  is  operative.  There  are  changes  that  in 
a  brief  view  appear  to  be  cumulative,  which  on  longer  study  are  seen 
to  be  rhythmic.  Again  and  again  men  have  been  forced  to  revise  their 
judgments,  either  hopeful  or  discouraging,  of  current  tendencies,  after 
time  had  enabled  them  to  see  a  larger  segment  of  the  curve  of  change 
returning  to  its  former  level. 


CHAPTER  33 
VOLITIONAL  DOCTRINE  OF  POPULATION 

§  1.  Volitional  control;  beginning  and  development.  §  2.  Volitional 
control  and  private  property.  §  3.  Class  differen'ces  in  volitional  control. 
§  4.  The  standard  of  life.  §  5.  The  quality  of  population.  §  6.  Decrease 
of  the  successful  elements.  §  7.  The  menace  to  progress.  §  8.  The  net 
resultant  of  population.  §  9.  Volitional  control  decentralized.  §  10. 
Conclusion  on  Malthusianism. 

§  1.    Volitional    control ;    beginning    and    development. 

The  action  of  mankind  with  relation  to  population  gradually 
changes  from  merely  instinctive  to  volitional  control.  By 
volitional  control  is  meant  any  purposeful  act  of  mankind 
by  which  the  effects  of  the  biologic  factors  determining  the 
birth  and  survival  of  children  are  weakened.  This  may  be 
done  directly  or  indirectly  in  a  great  variety  of  ways,  by  indi- 
vidual men  or  women  or  by  social  customs,  beliefs,  and  insti- 
tutions which  individuals  share  and  which  influence  their 
actions.  One  of  the  crudest,  earliest,  and  most  general  methods 
is  the  destruction  of  offspring  before  or  after  birth.  The 
student  of  savage  races  finds  in  the  methods  applied  to  prevent 
the  birth  of  children  an  almost  inconceivable  brutality.  In- 
fanticide was  practised  in  ancient  times  among  the  most 
advanced  peoples,  as,  for  example,  in  Sparta  and  Rome,  where 
not  only  deformed  and  weak  children,  but  unwelcome  ones, 
were  destroyed.  The  practice  is  permitted  even  to-day  by 
public  opinion  among  some  classes  in  the  densely  populated 
districts  of  the  world.  It  is  one  of  the  dark  spots  on  our  own 
civilization. 

In  all  savage  tribes  marriage  is  surrounded  by  ceremony 
and  in  many  by  economic  obstacles.    Usually  the  young  man 

414 


Ch.  33]  VOLITIONAL  DOCTRINE  OF  POPULATION  415 

is  unable  to  marry  until  he  has  become  skilled  in  all  the  arts 
and  learned  in  all  the  traditions  of  the  tribe,  and  has  proved 
his  prowess  in  the  hunt  and  in  battle.  It  is  the  merit  system 
with  a  qualifying  examination  for  matrimony.  Even  then 
the  young  man  must  have  enough  pelf  to  buy  a  wife  from  her 
family,  or  (in  exogamy)  must  steal  her  from  a  neighboring 
tribe  or  clan  (not  being  allowed  to  marry  within  the  clan). 
In  modern  days  every  artificial  taste  and  sentiment  that  en- 
courages bachelorhood  or  spinsterhood  is  an  element  in  voli- 
tional control.  Postponement  of  marriage  (as  recommended 
by  Malthus)  beyond  the  natural  mating  time,  is  one  of  the 
chief  methods  of  volitional  control.  It  is  rare  that  the 
motive  for  postponing  or  altogether  avoiding  marriage  is  di- 
rectly and  immediately  the  wish  to  escape  parenthood;  now 
it  is  religious  zeal  (monasticism  and  celibacy  of  the  priest- 
hood) ;  again  it  is  disappointed  sentiment;  here  it  is  conflict- 
ing duty  (education,  family  ties) ;  and  there  it  is  the  individ- 
ual's selfish  wish  to  retain  an  undivided  income  for  his  own 
enjoyment.  By  countless  strands  of  motive  in  the  form  of 
sentiments,  social  institutions,  and  interests  the  primitive  im- 
pulses of  humanity  are  firmly  bound ;  and  in  varying  degrees, 
in  different  classes,  the  enormous  possibilities  of  reproduc- 
tion are  controlled  by  human  volition, 

§  2.  Volitional  control  and  private  property.  Along 
with  enmity  for  other  tribes  is  found  in  many  early  societies 
an  approximation  to  tribal  communism.  A  condition  of  com- 
munism means  that  all  enjoy  together  when  food  and  wealth 
are  abundant,  and  all  starve  together  when  food  becomes 
scarce.  In  truly  communistic  conditions,  if  population  in- 
creases all  must  sink  together  into  want.  Private  property 
alters  the  nature  of  the  struggle  for  subsistence  and  of  the 
motives  for  limiting  population.  Society  divides  into  a  num- 
ber of  partially  independent  classes  or  family  groups,  each 
holding  its  share  of  wealth  apart,  not  in  common  with  the  tribe. 
The  pressure  of  increasing  numbers  upon  resources  is  confined 
by  individual  industry  and  by  private  property  to  special  por- 


416  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Px.  VI 

tions  of  the  population.  A  society  with  private  property  is 
like  a  ship  divided  into  a  number  of  water-tight  compart- 
ments. The  worst  effects  of  famine,  the  growing  want  of 
food  due  to  growth  of  numbers,  the  increased  disease  and 
starvation,  are  confined  to  the  propertyless  members.  Both 
the  rewards  of  industry  and  the  penalties  of  idleness,  incom- 
petence, and  improvidence  are  made  more  definite  and  cal- 
culable. This  affects  volitional  control  of  population  in  two 
ways :  it  strengthens  the  motives  for  the  production  of  wealth 
and  for  abstinence  by  individuals  and  in  family  groups;  it 
gives  a  motive  for  the  limitation  of  the  number  in  the  family, 
the  consumers  of  the  wealth.  A  smaller  family  with  larger 
resources  means  a  wider  margin  between  numbers  and  mis- 
ery, and  less  "pressure  of  population  upon  subsistence. ' '  This 
converts  the  problem  of  population  from  a  material  one  of 
a  balance  of  food  and  physical  needs,  to  a  psychic  one  of  a 
balance  of  motives  in  the  minds  of  men.  "When  this  stage 
is  reached,  the  extreme  objective  limits  either  of  the  birth 
rate  or  of  increase  of  population  are  no  longer  attained  in 
the  well-to-do  classes;  and  at  length  every  class  down  to  the 
most  improvident  becomes  in  some  measure  affected  by  these 
motives. 

§  3.  Class  differences  in  volitional  control.  No  wonder 
then  that  volitional  control  is  effective  in  very  different  de- 
grees in  different  families  and  industrial  classes.  The  pos- 
session of  property  is  both  a  sign  of  forethought  and  an  in- 
centive to  it.  Concern  for  the  welfare  of  children  is  one  of 
the  most  powerful  motives,  especially  after  social  distinctions 
become  marked.  It  may  become  abnormally  strong,  leading 
parents  to  sacrifice  their  own  welfare  or  their  own  lives  fool- 
ishly for  their  children,  as  is  done  often  in  the  accumulation 
of  property.  Among  the  classes  with  property  the  provision 
for  the  children  depends  not  only  upon  the  amount  of  wealth, 
but  upon  the  number  among  whom  it  is  to  be  divided.  It  is 
simple  division:  wealth  the  dividend,  number  of  children  the 
divisor. 


Ch.  33]  VOLITION.iL  DOCTRINE  OF  POPULATION  417 

Among  the  poorer  classes  very  different  motives  operate. 
After  the  first  few  years  of  the  children's  lives  the  parents' 
incomes  are  increased  by  the  earnings  of  the  children,  both 
on  the  farm  and  in  the  factory  districts  if  the  laws  do  not 
prohibit  child  labor.  Moreover,  when  the  children  are  grown, 
their  incomes  (wages)  will  depend  on  the  general  labor  mar- 
ket, not  on  the  number  of  their  brothers  and  sisters.  So  ac- 
cording as  the  family  income  is  mainly  from  capital  or  from 
labor,  the  motives  of  the  parents  differ. 

This  view  is  supported  not  only  by  general  observation  but 
by  many  statistical  studies  wherein  the  marriage  rates,  birth 
rates  and  survival  rates  of  different  states,  districts,  terri- 
torial divisions  of  cities,  and  industrial  classes  have  been 
compared  with  the  economic  forethought  as  indicated  by  some 
phenomenon  such  as  per  capita  wealth,  taxes,  savings,  edu- 
cation, etc.  The  correlation  between  volitional  control  and 
the  economic  factor  is  remarkable  when  large  numbers  are 
involved.  Those  detailed  studies  have  shown  that  volitional 
control  is  not  as  clearly  dependent  on  the  amount  of  accumu- 
lated riches  as  it  is  on  frugality,  prudence,  or  abstinence,  as 
one  may  prefer  to  call  it.  The  middle  class  of  shopkeepers, 
artists,  professional  workers,  and  small  capitalists,  striving 
to  get  ahead,  and  to  give  their  children  a  good  education  and 
a  start  in  life,  show  as  a  class  the  maximum  of  restraint  of 
population,  having  smaller  families  than  either  the  richest 
classes  or  the  poorest. 

§4  The  standard  of  life.  The  phrase,  "standard  of 
life,"  expresses  the  complex  thought  of  that  measure  of 
necessities,  comforts,  and  luxuries  considered  by  any  indi- 
vidual to  be  indispensable  for  himself  and  his  children;  that 
measure  which  he  will  make  great  sacrifices  to  secure.  This 
standard  differs  from  land  to  land,  from  class  to  class,  and 
from  time  to  time.  In  the  Asiatic  countries  it  is  so  low  that 
it  touches  in  large  classes  the  minimum  of  subsistence. 
Despite  adverse  influences  and  a  remarkable  series  of 
famines,  the  population  of  India  in  the  last  century  under 


418  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Pt.VI 

English  rule  increased  from  two  hundred  millions  to  three 
hundred  millions.  Such  a  population  "lets  out  all  the  slack" 
of  income,  and  never  takes  up  any.  The  great  public  works 
of  irrigation,  forestry,  and  transportation,  and  the  develop- 
ment of  industry  under  English  rule  increased  production, 
made  it  more  regular,  and  gave  an  opportunity  for  a  higher 
standard  of  living;  but  much  of  this  opportunity  was  used 
instead  to  permit  the  existence  of  a  greater  number  of  men 
in  the  same  old  misery.  These  facts  have  a  bearing  upon 
the  question  of  Oriental  immigration  to  America.  The  emi- 
gration of  millions  of  the  lower  class  laborers  of  China  and 
of  India  from  their  native  lands  would  leave  no  void  in  their 
numbers.  Those  races,  while  peopling  their  own  lands  con- 
stantly down  to  their  own  standard  of  living,  have  the  power, 
if  they  are  tempted  hither  in  great  numbers,  to  people  this 
continent  also  to  the  same  density.  On  the  other  hand,  a 
people  accustomed  to  a  goodly  income  and  to  a  large  measure 
of  comfort  of  surroundings  is  restrained  from  early  mar- 
riage and  large  families  by  far  different  motives  than  the 
fear  of  starvation.  When  the  increase  of  population  ceases 
to  be  actually  limited  by  objective  restraints  and  is  limited 
by  psychic  means,  there  is  no  telling  how  strong  the  new  forces 
will  become  or  where  they  will  cease  to  operate. 

The  desire  to  maintain  and  raise  the  standard  of  life  is 
the  most  effective  motive  limiting  population  in  our  society. 
The  American  standard  of  living,  while  it  differs  in  different 
classes,  is  on  the  whole  the  highest  found  anywhere  in  the 
world.  The  increasing  appeal  to  individual  selfishness,  the 
greater  ease  of  travel  and  taste  for  it,  the  multiplied  and 
costly  pleasures  and  pastimes,  make  children  a  greater  and 
greater  burden.  The  conditions  of  city  life  call  for  greater 
sacrifice  to  support  children,  and  give  less  value  to  their 
services  in  the  home.  In  the  greater  cities  are  large  areas 
where  no  family  with  a  child  can  rent  an  apartment.  De- 
spite the  increasing  incomes  of  the  masses  of  the  population, 
the  number  of  childless  homes  is  increasing,  and  while  the 


Ch.  33]  VOLITIONAL  DOCTRINE  OF  POPULATION  419 

standard  of  comfort  grows,  the  size  of  the  average  family 
dwindles.^ 

§  5.  The  quality  of  population.  The  quality  of  popula- 
tion is  of  quite  as  great  import  as  its  quantity,  alike  in  its 
economic,  its  social,  and  its  ethical  results.  The  productive 
force  of  a  population  is  not  measured  merely  by  numbers. 
"Who"  make  up  the  population  at  any  moment  is  no  more 
a  matter  of  indifference  than  "how  many."  One  new-born 
child,  unintelligent,  incapable,  foredoomed  to  become  a  bur- 
den, represents  a  negative  addition  to  society;  another,  with 
energy,  thrift,  inventive  genius,  comes  to  enrich  and  uplift 
his  fellow  men.  Quality  counts  for  much.  Social  progress 
is  not  necessarily  the  biological  betterment  of  the  native 
ability  of  men.  The  education  of  the  average  member  of 
society  is  becoming  yearly  better;  it  is  doubtful  whether  the 
innate  capacity  of  a  new-born  babe  in  Europe  and  America 
to-day  is  greater  than  it  was  among  our  Germanic  ancestors 
in  Roman  times.  Indeed,  the  progress  of  the  past  two  thou- 
sand years  has  been  in  social  organization,  in  the  enlargement 
and  simplifying  of  the  mass  of  knowledge  which  has  to  be 
reappropriated  by  each  new  individual,  rather  than  in  race- 
breeding  and  in  quality. 

Few  thoughtful  persons  now  hold  the  view  that  the  race 
can  be  improved  biologically,  rapidly  if  at  all,  by  the  process 
of  educating  the  individual.  Education  is  cumulative  in  so 
far  as  it  builds  up  a  better  environment  into  which  other  ehil- 

1  Size  of  the  census  family  in  the  United  States.  (Census,  1910,  vol. 
pop.  p.  1286.) 

The  term  family  as  used  in  the  census  does  not  mean  the  natural  or 
biologic  family,  but  a  household  or  group  of  persons,  whether  related  by 
blood  or  not,  who  share  a  common  abode,  usually  also  sharing  the  same 
table.  If  a  person  lives  alone,  he  constitutes  a  family;  while  on  the  other 
hand  many  people  dwelling  together  in  a  hotel  or  institution  are  also 
treated  as  forming  a  single  family.  Nevertheless,  these  figures  doubtless 
reflect  a  very  large  proportionate  decrease  in  the  average  number  of 
children  per  family,  a  conclusion  corroborated  by  much  other  evidence. 

Years  1850      1860      1870      1880      1890      1900      1910 

Persons   5.6        5.3         5.1         5.0        4.9        4.7         4.5 


420  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Pt.  VI 

dren  will  be  bom,  but  the  betterment  is  not  due  to  the  in- 
heritance by  the  child  of  the  acquired  knowledge  and  skill 
of  the  parent.  If  this  question  is  open  to  dispute  among 
biologists,  it  is  only  as  regards  a  minute  increment  of  im- 
provement. Practically,  selection  preserves  the  better  varia- 
tions as  they  appear,  and  to  eliminate  the  bad  variations  is 
the  only  means  of  improving  the  innate  capacity  of  any  spe- 
cies in  any  large  measure.  Many  forces  were  at  work  in 
the  past  to  lift  man  above  the  brute,  and  especially  to  in- 
crease the  average  brain-power  of  the  human  race.  The 
weak,  the  ignorant,  the  incapable,  in  primitive  societies  were 
ruthlessly  killed  off.  The  strong,  the  sagacious,  and  the  en- 
terprising left  the  largest  numbers  of  descendants. 

§  6.  Decrease  of  the  successful  elements.  Under  modern 
conditions,  volitional  control  is  acting  with  the  greatest  force 
in  the  more  capable  classes  and  thus  threatens  to  reduce  the 
quality  of  the  population.  The  successful  elements  of  society 
are  the  less  prolific.  Large  families  were  the  rule  among 
the  capable  pioneers  of  America;  now  they  are  rare  except 
in  the  lower  industrial  ranks.  The  average  number  of  chil- 
dren reaching  maturity  in  the  families  of  the  American  colo- 
nists was  six;  the  average  number  to-day  in  families  of  colo- 
nial ancestry  is  about  two,  except  in  the  rural  districts  of 
parts  of  the  South  and  "West.  Since  many  of  these  children 
do  not  live  to  maturity,  and  of  those  who  do  survive  many 
do  not  marry,  the  stock  does  not  maintain  itself  in  numbers. 
Much  larger  families  are  found  among  the  poor  whites  of 
the  mountains,  the  newly  arrived  immigrants  in  the  .cities, 
the  negroes  in  the  black  belt  of  the  South,^  and,  in  general, 
those  in  the  lower  ranks  of  labor.  Forces  are  at  work  to 
sterilize  or  reduce  in  number  the  elements  of  the  population 
that  are  more  prosperous  and  enterprising.  The  "new 
woman"  movement,  tempting  into  ** careers,"  takes  away 
from  family  life  many  of  the  women  most  worthy  to  become 

2  But  not  in  the  other  parts  of  the  country,  from  well  recognized 
causes.     See  Figure  58. 


Cn.  33]  VOLITIONAL  DOCTRINE  OF  POPULATION  421 

the  mothers  of  succeeding  generations.  Self-interest  is  at 
war  with  the  social  interest.  The  individual  asks,  **Am  I 
bound  to  sacrifice  my  comfort  and  happiness  to  the  general 
good?"  The  effect  of  this  is  a  steady  decline  in  the  pro- 
portion of  the  population  (referring,  of  course,  only  to  gen- 
eral averages  and  not  to  particular  cases)  born  of  the  suc- 
cessful strains  of  stock,  and  a  steady  increase  of  the  de- 
scendants of  the  mediocre  and  duUer-witted  elements.  This 
is  a  paradox,  that  the  fittest  to  succeed  industrially  are,  by 
that  very  fact,  beaten  in  the  race  for  biologic  survival. 

Democracy  and  opportunity  favor  this  process  of  increas- 
ing the  mediocre  and  reducing  the  excellent  strains  of  stock. 
Caste  and  status  in  the  past  kept  successive  generations  of 
capable  men  in  humble  social  ranks  from  which  only  by 
chance  some  remarkable  individual  could  rise.  In  a  de- 
mocracy, those  of  marked  ability  can  more  easily  move  into 
the  better-paid  callings  and  professions.  This  individual 
good  fortune,  however,  reduces  the  probability  of  offspring. 
In  the  higher  ranks  of  business  and  the  professions  are  more 
bachelors  and  old  maids  than  in  the  lower  ranks,  and  fewer 
children  are  born  to  each  marriage.  It  has  been  found  that 
one  fourth  of  the  graduates  of  Harvard  in  the  last  generation 
remained  single,  and  the  average  number  of  children  of  the 
married  graduates  is  two.  That  group  of  men,  therefore,  has 
left  only  three  fourths  enough  descendants  to  maintain  its 
numbers,  and  as  the  population  has  doubled  within  the  same 
generation,  that  class  represents  only  three  eighths  as  large 
a  proportion  of  the  American  stock  as  in  the  preceding  gen- 
eration. 

§  7.  The  menace  to  progress.  This  sterilization  of  abil- 
ity has  cumulative  results.  If  society  were  composed  in  equal 
parts  of  two  distinct  strains  of  stock,  not  intermarrying;  if 
the  total  population  remained  unchanged  in  numbers  from 
one  generation  to  another  (say  each  period  of  thirty  years) 
but  the  superior  strain  contributed  only  three  fourths  of  its 
own  number,  at  the  end  of  five  generations  it  would  have 


422  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Pt.VI 

sunk  from  one  half  to  a  little  more  than  one  eighth  of  the 
population.  A  period  brief  in  the  life  of  nations  would  serve 
to  leave  it  an  almost  negligible  factor  in  the  community. 
There  can  hardly  be  a  doubt  that  at  present  our  society  is 
on  the  average  increasing  more  from  the  less  provident,  less 
enterprising,  less  intelligent  classes.  There  has  not  yet  been 
time  for  many  of  the  cumulative  effects  of  this  process  to 
appear.  Progress  is  threatened  unless  social  institutions  can 
be  so  adjusted  as  to  reverse  this  process  of  multiplying  the 
poorest  and  of  extinguishing  the  most  capable  families.  The 
object  of  the  eugenics  movement  is  to  introduce  an  element 
of  rational  direction  into  the  process  of  perpetuating  the  race, 
so  that  disease,  weakness,  and  degeneracy  may  be  dimin- 
ished, and  health,  strength,  and  superior  capacity  shall  be 
increased. 

§  8.  The  net  resultant  of  population.  Whether  the  pop- 
ulation on  the  whole  shall  grow,  stand  still,  or  diminish  de- 
pends on  the  relative  strength  of  contending  forces  making 
for  life  or  death;  on  the  one  hand,  those  favoring  a  high 
birth  rate  and  low  death  rate,  and  on  the  other  those  limiting 
births  and  survival.  This  control  of  the  movement  of  popu- 
lation loses  its  cruder  aspect  and  is  waged  in  the  realm  of 
motive.  More  and  more  it  is  volition  that  controls  in  human 
society  the  growth  of  population;  less  and  less  it  is  the  ob- 
jective limit  of  the  food-supply.  Dire  need  resulting  in  ill- 
health  and  even  in  starvation  is  still  acting  in  some  portions 
of  society,  but  less  to-day  than  ever  before.  The  growth  of 
population  in  this  stage  is  not  "fatalistic,"  as  there  is  no 
inevitable  tendency  to  increase  or  to  decrease.  It  depends 
on  the  interaction  of  a  number  of  forces,  clearly  distinguish- 
able, by  which  population  actually  is  kept  far  within  the 
limits  of  food  resources.  Human  choice  is  the  guiding  in- 
fluence, choice  shared  by  every  normal  member  of  the  com- 
munity. 

§  9.  Volitional  control  decentralized.  Volitional  control 
is  not  exercised  by  a  central  and  unified  despotism  determin- 


Ch.33]  volitional  DOCTRINE  OF  POPULATION  423 

ing  human  action,  but  it  is  effected  by  motives  of  the  most 
complex  sort,  diffused  throughout  society  and  acting  upon 
every  member  of  it.  Volitional  control,  in  its  very  nature, 
is  decentralized.  Each  individual  and  family  group,  by  its 
own  choice,  places  limits  upon  its  addition  to  numbers,  de- 
cides how  much  margin  shall  be  left  between  its  standard  of 
life  and  bare  subsistence,  and  how  it  shall  use  the  income 
which  would  permit  earlier  marriage  and  larger  families  on 
a  lower  standard  of  living.  The  whole  population,  it  is  true, 
is  an  arithmetic  resultant  of  the  population  changes  within 
the  separate  family  groups;  but  large  classes  and  districts 
show  certain  average  differences,  which  continue  for  long 
periods  with  little  change  (e.g.,  the  rural  peasantry  has  a 
higher  birth  rate  than  the  city  artisans;  French  Brittany 
higher  than  the  departments  near  Paris).  There  are  easily 
observable  causes  for  these  differences  among  classes  and  dis- 
tricts, yet  there  is  no  organic  connection  between  the  parts, 
such  as,  for  example,  might  make  it  necessary  for  Brittany 
to  make  up  the  deficit  of  the  Parisian  neighborhood  in  order 
to  maintain  a  stationary  population  in  France.  In  any  com- 
munity with  a  population  stationary  because  of  volitional 
control  (e.g.,  France  between  1900-1914)  and  not  from  objec- 
tive checks  (war,  famine,  etc.),  it  is  both  possible  and  prob- 
able that  the  population  will  begin  to  decrease.  This  must 
happen  when  the  ideas,  customs,  ambitions,  and  practices  of 
the  groups  which  do  not  maintain  their  numbers,  gradually 
spread  to  the  groups  which  only  a  little  more  than  maintain 
their  numbers.  The  opening  up  of  opportunities  for  young 
men  to  marry  as  population  declines  (as  by  farms  becoming 
tenantless,  houses  vacant,  etc.)  retards  the  decrease  of  popu- 
lation, but  the  standard  of  living  and  individualistic  desires 
may  advance  more  rapidly  than  the  incomes,  and  cause  pop- 
ulation to  go  on  decreasing.  A  check  to  this  movement  can 
come,  it  would  seem,  only  .through  changes  in  ideals  as  to 
social  duties  and  race  culture  already  foreshadowed,  but  too 
complex  to  be  foreseen  in  detail. 


424  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Pt.  VI 

§  10.  Conclusion  on  Malthusianism.  In  the  light  of  the 
preceding  discussion  what  is  to  be  the  judgment  on  the  doc- 
trine of  Malthus?  Can  the  question,  "Was  Malthus  essen- 
tially right?"  be  answered  with  yes  or  no?  It  is  best  to  de- 
cline to  answer  the  question  put  in  that  way.  His  outlook 
on  the  matter  was  so  different  from  ours,  and  the  doctrine 
involved  various  elements  some  of  which  have  stood  and  others 
have  fallen.  Let  us  distinguish.  He  was  right  in  his  as- 
sumption that  the  physiological  maximum  birth  rate  is  ex- 
cessive for  modern  conditions.  The  purely  biologic  parts  of 
the  doctrine  of  population  have  since  his  day  been  given  a 
much  broader  justification.  Man  is  physically  an  animal, 
and  if  he  were  not  more  than  an  animal  mentally  and  mor- 
ally, the  adjustment  of  population  to  resources  would  be  no 
different  from  the  struggle  of  animals  for  existence.  He  was 
right  in  this  hypothetical  conclusion,  and  there  are  those  who 
take  this  to  be  the  most  essential  part  of  the  Malthusian  doc- 
trine. 

But  Malthus  himself  did  not  look  upon  this  as  his  prin- 
ciple— but  only  as  a  premise,  a  fundamental  fact  from  which 
he  reasoned.  His  "principle"  was  that  there  actually  is 
and  must  be  this  pressure  of  population  against  subsistence. 
It  involved  the  notion  that  the  food  supply,  as  a  thing  some- 
how outside  of  the  power  of  men  to  control,  determined  the 
size  of  the  population.  It  was  offered  as  an  explanation  of 
misery,  and  as  a  prophecy  of  inevitable  misery  to  come. 
This  does  not  accord  with  past  experience  or  with  present 
conclusions  of  reasoning.  Indeed,  Malthus  never  rightly  ad- 
justed his  idea  of  "moral  restraint"  to  his  ideas  of  objective 
checks.  He  never  adequately  comprehended  the  role  of  the 
volitional  factor.  He  thought  of  it  as  modifying  in  certain 
circles,  but  not  as  transforming  for  whole  populations  the 
process  of  the  adjustment  of  numbers  to  resources.  He  tried 
to  keep  his  doctrine  on  a  material  basis,  as  the  ancient  philoso- 
phers put  the  earth  upon  a  giant  and  a  tortoise.  He  did  not 
conceive  of  population  as  removed  from  this  material  basis. 


Cn.33]  VOLITIONAL  DOCTRINE  OF  POPULATION  425 

suspended  in  space,  held  (as  is  the  earth  by  gravitation)  by 
the  intangible  forces  of  volitional  control. 

Finally,  Malthus  had  no  conception  of  the  importance  of 
quality  of  population  and  the  way  that  quality  modifies  the 
relation  of  numbers  to  material  resources.  He  did  not  ap- 
preciate the  dynamic  influence  which  the  very  pressure  of 
population  and  its  necessities  may  have  in  stimulating  effort 
and  invention.  He  conceived  of  population  movements  as 
rhythmic,  but  essentially  static.  His  was  a  static  doctrine 
of  population.  Only  in  his  somewhat  crude  biologic  doctrine 
(no  small  matter,  however)  has  he  stood  the  test  of  time.  In 
all  other  regards  his  views  have  had  to  be  greatly  modified, 
corrected,  and  developed  to  fit  the  needs  of  modern  thought. 


CHAPTER  34 
DECREASING  AND  INCREASING  RETURNS 

§  1.  Estimates  of  the  world's  population.  §  2.  Population  growth 
in  Europe  since  1800.  §  3.  Increase  since  1790  in  America.  §  4. 
Relation  of  population  to  resources.  §  5.  Birth  rates.  §  6.  Death  rates. 
§  7.  Population  growth  and  intensive  cultivation.  §  8.  Law  of  increas- 
ing and  decreasing  returns.  §  9.  Increasing  returns  in  the  nineteenth 
century.  §  10.  Rhythmic  changes  of  population.  §  11.  Cumulative  dy- 
namic economy.  §  12.  Individual  and  general  adjustment  to  static  con- 
ditions. §  13.  Adjustment  to  dynamic  forces.  Note  on  Various  mean- 
ings of  diminishing  returns. 

§  1.  Estimates  of  the  world's  population.  The  move- 
ment of  population  can  be  known  with  approximate  accuracy 
only  where  a  census  of  the  population  is  regularly  taken. 
This  was  done  nowhere  until  the  end  of  the  eighteenth  cen- 
tury, and  even  now  is  done  for  only  a  small  part  of  the  world. 
In  all  other  places  and  times,  movements  of  population  can 
only  be  estimated,  usually  from  very  insufficient  data.  It  is 
certain,  however,  that  in  ancient  times  a  considerable  density 
of  population  was  attained  only  in  a  few  centers  of  empire 
(Egypt,  Babylon,  Persia,  Greece,  Rome,  etc.),  where  peace, 
trade,  fertile  soil,  comparatively  advanced  methods  of  agri- 
culture, accumulated  wealth,  and  extended  political  power 
with  tributes  from  subject  people  were  combined  in  an  ex- 
ceptional degree.  Nearly  the  whole  of  the  habitable  globe 
was  possessed  by  hunting  tribes  or  by  pastoral  nations  very 
sparsely  peopling  the  lands.  It  has  been  estimated  that  the 
population  of  the  earth  at  the  death  of  Augustus  (19  a.d.) 
was  about  50  million.^     Since  1800  there  is  more  of  knowledge 

1  The  Italian  economist  Bodio's  estimate  is  54  million. 

426 


Cn.  34]        DECREASING  AND  INCREASING  RETURNS  427 

and  less  of  guess  work  in  the  figures,  which  have  been  esti- 
mated as  follows :  ^ 

Population  Yearly  arithmetic  Percentage 

of  the  increase  in  pre-  increase  in 

world;  ceding  decade ;  preceding 

millions  millions  decade 

1800    640 

1810     

1820     780  7.  10. 

1830    847  7.  8.6      . 

1840     950  10.  11. 

1850     1,075  13.  13. 

1860     1,205  13.  12. 

1870     1,310  10.  8.7 

1880     1,439  13.  9.1 

1890    1,488  6.  3.4 

1900    1,543  6.  3.8 

1910     1,616  7.  4.7 

Eepeating  the  warning  that  these  figures  are  mere  esti- 
mates, it  may  yet  be  believed  that  a  great  increase  had  taken 
place  between  the  first  century  and  the  year  1800,  of  which 
a  large  part,  about  half,  had.  been  in  the  Chinese  Empire, 
numbering  then  about  300,000,000  people.  But  the  most  enor- 
mous increase  occurred  between  1800  and  1910,  about  one 
billion  people  being  added  to  the  world 's  population,  the  total 
in  1910  being  nearly  three  times  as  great  as  it  was  in  1800. 

The  population  of  Europe  is  said  hardly  to  have  exceeded 
50,000,000  before  the  fifteenth  century^  at  which  time  Eng- 
land had  about  2,500,000  people.*  Population  grew  rapidly 
from  the  end  of  the  fifteenth  century  with  the  increase  of 
centralized  government,  better  agricultural  methods,  foreign 
trade,  inventions,  etc.  An  enormous  loss  of  life  took  place 
on  the  Continent  during  the  Thirty  Years'  War  (1618-1648), 
still  a  term  of  dread  in  Germany  which,  during  that  time,  lost 

2  The  first  column  was  compiled  from  various  authorities  by  Prof. 
W.  F.  Willcox,  in  his  paper  "The  Expansion  of  Europe";  from  which  we 
have  derived  the  yearly  arithmetic  increase  and  percentage  of  increase 
by  decades. 

3  Mulhall's  "Dictionary  of  Statistics." 

4  At  accession  of  Henry  VII,  1485  a.d.  See  Traill's  "Social  England," 
vol.  Ill,  p.  129. 


428  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Pt.  VI 

through  violence,  pestilence,  and  famine  about  two  thirds  of 
its  former  population.  Despite  numerous  wars  the  popula- 
tion of  Europe,  according  to  a  widely  quoted  estimate,  was 
130,000,000  in  1761,^  and  was  about  175,000,000  in  1800.« 

§  2.  Population  growth  in  Europe  since  1800.  Popula- 
tion increased  in  Europe  at  an  unprecedented  rate  in  the  nine- 
teenth century.  It  numbered  about  175,000,000  in  1800, 
over  250,000,000  in  1850,  about  390,000,000  in  1900,  and  400,- 
000,000  in  1910.  Many  things  helped  to  increase  the  food- 
supplies  available  for  Europe.  The  resources  of  the  Amer- 
ican continent  were  hardly  touched  until  the  great  western 
movement  of  population  began  and  new  agencies  of  trans- 
portation brought  American  fields  thousands  of  miles  nearer 
to  European  markets.  The  improvement  of  machinery  and 
of  other  economic  equipment  in  Europe,  and  better  methods 
of  cultivation  aided  to  increase  production  rapidly.  Popula- 
tion followed,  tho  not  with  equal  step.  The  increase  has 
gone  on  at  undiminished  pace  in  eastern  and  southeastern 
countries  but  recently  there  has  been  a  notable  decline  in  the 
rate  of  increase  in  several  of  the  countries  of  western  Europe. 
France  has  been  nearly  at  the  stationary  stage  since  the  be- 
ginning of  the  twentieth  century,  and  England  probably  will 
have  reached  it  by  the  middle  of  the  century.  The  great  war 
begun  in  1914  must,  in  the  warring  nations,  greatly  reduce 
the  marriage  rate,  increase  the  death  rate,  and  reduce  the 
birth  rate,  until  the  end  of  hostilities.  The  men  killed  in 
battle  are  fewer  than  the  children  never  to  be  born,  who  but 
for  the  war  would  have  come  into  the  world. 

A  stationary  or  declining  population  throughout  Europe 
sometime  after  the  return  of  peace  is  a  possibility.  But  this 
does  not  destroy  the  significance  of  the  fact  that  there  is  in- 
herent in  humanity  a  great  potential  power  of  increase,  the 
realization  of  which  would  be  disastrous,  the  limiting  of  which 

6  Estimate  of  Sussmilch,  the  famous  statistician  of  the  eighteenth 
century. 
0  Estimate  of  Levasseur,  cited  by  Willcox. 


Ch.34]    decreasing  AND  INCREASING  RETURNS 


429 


^ooooooooooooo 


Pia.    57.     Population    in    U.    S. 
1790-1910,   White  and  Negro. 


either  by  crude  objective  means 
(famine,  war,  illicit  measures) 
or  by  volitional  means  is  inevi- 
table. It  does  not  disprove  the 
great  biologic  proposition  in  the 
Malthusian  doctrine. 

§  3.  Increase  since  1790  in 
America.  The  growth  of  the 
population  of  the  United  States 
since  1790  (the  date  of  our  first 
census)  has  been  proportionally 
much  greater  than  that  of  the 
European  countries.  But  it  has 
been  in  two  respects  different 
from  theirs,  and  abnormal :  in  be- 
ing so  greatly  aided  by  immigra- 
tion (while  many  of  them  lost 
greatly  by  emigration)  ;  and  in 
spreading  over  wide  new  areas  of  land,  almost  uninhabited 
before,  instead  of  merely  increasing  the  density  of  population 
on  the  same  area  of  land.'^ 

7  Population  of  the  United  States  at  each  census  1790  to  1910. 


1790 
1800 
1810 
1820 
1830 
1840 
1850 
1860 
1870 
1880 
1890 
1900 
1910 

a  Census  office's  adjusted  figures  for  1870  and  1880,  correcting  sup- 
posed omissions  in  the  census  of  1870. 

bThe  decrease  in  average  density  is  explained  in  the  text,  p. 


Population 
millions 
3.9 

Per  cent 

increase 

preceding 

decade 

35.  i 

36.4 

33.1 

33.5 

32.7 

35.9 

35.6 

26.6  a 

26.0  a 

24.9 

20.7 

21.0 

Density 
per  sq.  m. 

4.5 

6.1 

4.3 

5.5 

7.3 

9.7 

7.9 
10.6 
13.0 
16.9 
21.2 
25.6 
30.9 

Number  added 

per  sq.  m. 

preceding 

decade 

5.3 

1.6 

7.2 

—1.8  2 

9.6 

1.2 

12.9 

1.8 

17.1 

2.4 

23.2 

1.8  2 

31.4 

2.7 

39.8  a 

50.2 

2.4 
3.9 

62.9 

4.3 

76.0 

4.4 

92.0 

5.3 

430. 


430 


DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Pt.  VI 


The  population  the  first  three  decades  increased  almost  en- 
tirely extensively,  moving  toward  an  ever-widening  frontier, 
spreading  itself  over  a  great  territory.  Twice  did  great  ad- 
ditions of  territory  cause  the  average  density  to   decrease 

(1800-1810  and  1840- 
1850).  Cities,  meantime, 
were  growing,  and  decade 
by  decade  from  1850  on 
the  growth  of  population 
was  in  nature  more  inten- 
sive. The  increase  in  the 
number  of  persons  per 
square  mile  in  the  first 
thirty  years  amounted  to 
only  one  person;  in  the 
second     (1820-1850)     was 

Fia.    58.     Decennial   Rate    of   Inceeask,    2.4    persons ;    in    the    third 
1790-1910.*  /locTA    ioon\  n 

(1850-1880)  was  9  per- 
sons; and  in  the  last  (1880-1910)  was  14  persons  per  square 
mile.  The  average  density  increased  14  times  as  fast  in  the 
last  thirty  as  in  the  first  thirty  years,  having  almost  doubled 
between  1880  and  1910.  A  large  part  of  our  area  is  desert, 
greatly  inferior  to  the  sandy  northern  plains  of  Europe,  and 
a  large  part  is  barren  mountain  (the  Rockies),  greatly  in- 
ferior to  the  well-watered  Alps,  as  a  place  for  human  habita- 

*  The  first  rate  shown  is  for  the  decade  ending  1800,  the  last,  1910. 
The  average  rate  for  the  whites  until  1860  was  around  35  per  cent,  but 
the  trend  since  has  been  downward  until  in  the  last  two  decades  it  has 
been  less  than  %  as  high  as  it  was  then;  it  would  be  much  less  but 
for  the  very  large  European  immigration. 

The  rate  of  increase  of  the  negroes  has  been  less  than  that  of  the 
whites  in  every  decade  but  one,  and  the  trend  of  the  rate  has  been 
downward  since  1810.  It  now  is  about  i^  of  what  it  was  in  the  begin- 
ning, and  practically  the  whole  of  the  increase  is  now  due  to  the  South 
Atlantic  and  South  Central  divisions.  Elsewhere  the  negro  population 
would  be  either  stationary  or  decreasing  in  numbers  but  for  the  migra- 
tion from  the  southern  states  (and  some  from  the  West  Indies). 


Ch.  34]         DECREASING  AND  INCREASING  RETURNS  431 

tion.  Still  the  population  of  the  United  States  is  sparse 
compared  with  the  countries  of  Europe. 

§  4.  Relation  of  population  to  resources.  We  can  ac- 
count for  this  wonderful  growth  of  population  throughout 
the  world  only  in  the  light  of  the  increased  power  of  pro- 
duction of  wealth.  The  population  of  different  countries,  and 
of  different  sections  of  a  country,  is  seen  to  bear  a  general 
relation  to  their  resources.  A  community  with  a  poor  soil, 
little  wealth,  and  no  machinery  is  doomed  to  remain  few  in 
numbers.  Mountains,  districts  poorly  watered,  the  frozen 
regions  of  the  North,  are  sparsely  populated  because  natural 
resources  are  lacking.  If  food  production  alone  is  thought  of 
there  are  apparent  exceptions  to  this  statement,  but  there  are 
no  absolute  contradictions  of  it.  A  favored  harbor  may  make 
possible  a  flourishing  commerce  on  a  rocky  coast;  an  infertile 
soil  may  support  a  large  population  when  great  deposits  of 
coal  or  iron  insure,  by  exchange,  great  food-supplies.  Pro- 
ductivity must  be  measured  under  modern  conditions  by  the 
purchasing  power  that  is  possible  in  the  environment. 

The  whole  world  has  been  coming  more  into  the  condition 
of  political  security,  settled  industry,  and  improved  methods 
of  production.  The  result  has  been  a  great  reduction  in  the 
extent  and  severity  of  famines,  an  increase  of  the  real  in- 
comes of  the  masses,  and  the  survival  of  large  numbers  of 
people,  young  and  old,  who  formerly  would  have  been  cut 
off.  The  increase  of  wealth,  made  possible  by  the  new  condi- 
tions, has  gone  largely  to  increase  the  number  of  people.  The 
biologic  factor  in  population  is  great  and  ever  present. 

§  5.  Birth  rates.  The  increasing  population  has  not  been 
due  to  any  general  increase  in  the  birth  rate.  In  most  coun- 
tries where  there  are  any  records  it  has  been  decreasing,  and 
in  some  cases  more  rapidly  than  has  the  death  rate.  The 
world's  birth  rate  in  1911  is  estimated  to  be  36.5  per  thousand 
of  population;  that  of  the  more  advanced  industrial  coun- 
tries is  much  less.  In  the  quarter  century  between  1886  and 
1912  the  birth  rate  decreased  in  certain  countries  as  follows: 


432  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Pt.  VI 

Birth  rate 

1886  1912          Deorease 

Australian  Commonwealth 35.4  27.2  8.2 

Austria   38.3  31.4  6.9 

United  Kingdom   32.8  24.0  8.8 

France 23.9  19.0  4.9 

German  Empire 37.0  28.3  8.7 

Hungary   45.6  36.3  9.3 

Netherlands    34.6  28.1  6.5 

Denmark     32.6  20.7  5.9 

Norway     31.1  25.4  5.7 

Sweden    29.8  23.7  6.1 

Italy    37.0  32.6  4.4 

Spain   36.7  31.9  4.8 

§  6.  Death  rates.  A  general  decrease  of  the  death  rate 
makes  possible  a  growth  of  population  even  with  a  decreas- 
ing birth  rate.  The  food  production  has  been  increasing  and 
famines  have  been  decreasing,  while  great  improvements  in 
medical  and  in  sanitary  science  have  at  the  same  time  been 
made.  The  death  rate  in  a  community  is  a  rough  index  of 
its  general  welfare:  the  death  of  a  large  proportion  of  the 
children  before  they  arrive  at  maturity  indicates  poverty  or 
ignorance.  The  urban  death  rate  in  Europe  in  the  Middle 
Ages  was  tremendously  high,  but  during  the  nineteenth  cen- 
tury, as  a  result  of  engineering  and  sanitary  progress,  it  sank 
nearly  to  that  of  the  country  districts.  The  race  of  man, 
ever  since  the  beginnings  of  volitional  control,  has  had  a 
smaller  death  rate  relative  to  the  total  number  of  individuals 
coming  into  existence  than  has  any  other  species  of  living 
creatures.  Even  in  the  most  miserable  industrial  population 
where  one  half  the  children  die  before  they  are  five  years 
old,  the  death  rate  is  much  less  than  among  the  young  of 
the  lion  or  the  eagle.  The  average  human  death  rate  became 
much  less  in  the  nineteenth  century  than  it  had  ever  been 
before.  The  death  rate  in  the  world  as  a  whole  in  1911  is 
estimated  to  be  28.9  per  thousand,  which  is  far  greater  than 
that  of  the  more  advanced  countries.  The  decrease  in  a  quar- 
ter of  a  century  in  certain  countries  is  as  follows  (for  com- 
parison with  preceding  table)  : 


Cii.  34]         DECREASING  AND  INCREASING  RETURNS  433 

Death  rate 

1885  1912  Decrease 

Australian    Commonwealth    15.7  10.7  5.0 

Austria   30.1  20.6  9.5 

United  Kingdom    19.4  13.8  5.6 

France     22.2  17.5  4.7 

German  Empire    25.3  15.6  9.7 

Hungary  33.1  23.3  9.8 

^'etherlands     21.4  12.3  9.1 

Denmark     18.4  13.0  5.4 

Norway     17.2  13.4  3.8 

Sweden    17.5  14.2  3.3 

Italy    27.3  18.3  9.0 

Spain     32.6  21.3  11.3 

The  estimates  of  world  population  indicate  that  the  increase 
of  numbers  was  at  the  greatest  rate  in  the  half  century  from 
1830  to  1880  and  that  it  is  now  much  less.  Population  in- 
creased so  rapidly  that  the  limit  of  resources  began  to  be 
felt.  The  pressure  of  population  makes  itself  felt  in  various 
ways,  and  on  various  levels  of  national  culture  in  Japan, 
India,  Germany,  the  United  States,  and  in  almost  all  other 
lands. 

§  7.  Population  growth  and  intensive  cultivation.  Let 
us  analyze  the  process  of  change  when  population  is  a  dy- 
namic factor.  A  growth  of  numbers  disturbs  an  established 
equilibrium  of  cultivation  on  the  extensive  and  intensive  mar- 
gins (see  Chapter  12),  changes  the  relation  of  the  value  of 
labor-services  to  land  uses  (and  to  all  instrumental  uses), 
and  leads  to  new  levels  of  adjustment.  Real  changes  are,  of 
course,  always  complex,  and  along  with  population-changes 
go  changes  in  machinery,  area,  methods,  use  of  fertilizers, 
etc.  Our  question  is  as  to  the  effect  of  population-change  in 
itself  considered,  other  things  being  equal,  and  for  simplicity 
is  limited  here  to  the  ease  of  staple  food  crops. 

A  population  on  an  area  varying  in  fertility  would  apply 
its  labor  to  the  best  tract.  This,  in  an  earlier  example  ( Chap- 
ter 15)  would  be  A,  where,  by  hypothesis,  10  days'  labor 
produces  24  units.  Wages  would  stand  at  the  level  of  2.4 
bushels  and  rents  would  be  nil.    When  the  pressure  of  popu- 


434 


DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Pt.  VI 


lation  requires  that  B  should  be  cultivated,  the  wages  on  A 
would  be  22  bushels  and  rent  about  2  bushels.  When  culti- 
vation moves  to  tracts  C  and  D,  rent  arises  successively  on 
B  and  C.  If  each  tract  continued  to  be  cultivated  with  the 
same  amount  of  labor  as  before,  the  rent  on  A  would  be  first 
2,  then  4,  then  6  bushels  when  tract  D  first  came  under  cul- 
tivation ;  the  rent  on  B  would  then  be  4  bushels,  and  the  rent 
on  C,  2  bushels.     (See  Figure  59.) 

A  B  C  D 


Rent 

Levels 


vwjjim 


w^^^  .^^^  i^^V^^ 


Fia.   59.     Extensive   Cultivation  and   the   Rent   Levels. 

Rents  on  grades  of  land  with  different  degrees  of  extension  of  culti* 
vation   (approximate). 

Tract  — 

A  B  C  D 

When  A  only  0  0  0  0 

When  B  first  taken   2  0  0  0 

When  C  first  taiien    4  2  0  0 

When  D  first  talcen   6  4  2  0 

When  D  more  intensive   G-j-  4-j-  2-}-  0-|- 

But  with  each  extension  of  the  margin  of  cultivation  there 
should  occur  increasing  intensity  of  cultivation  on  the  older 
tracts,  so  that  the  return  to  a  unit  of  labor  should  be  equal 
in  the  two  uses.  When  labor  will  yield  but  2.2  bushels  on 
B,  it  will  be  applied  on  A  as  long  as  it  yields  as  much  as 
2.2  bushels  (not  2.4  as  before).  Then  this  would  work  out 
as  to  rents  and  wages  (in  bushels)  as  shown  in  the  table. 
(The  amount  of  increase  of  labor  for  intenser  cultivation  is 
arbitrarily  assumed.  It  would  vary  in  practice  but  always 
be  more  intense  as  cultivation  extended.) 


Cost  of  Bushels  Rent 

labor 

raised    per 

per 

per      acre 

;  acre 

acre 

24. 

24.        0 

24.2 

26.3       2.1 

24. 

28.4       4.4 

23.4 

30.3       6.9 

CH.  34]        DECREASING  AND  INCREASING  RETURNS  435 

TABLE  1 

SxjccESSiVE  Static  Equilibkia  on  Tract  A,  with  a.  Slow  Rate  of 

Growth  of  Intensity  of  Cultivation 

Units  of  Cost 

labor  on      of 

the  best  labor 
land  per  unit 

When  first  grade  of  land  first  used.    10  2.4 

When  second  grade  of  land  first  used   11  2.2 

When  third  grade  of  land  first  used.    12  2.0 

When  fourth  grade  of  land  first  used  13  1.8 

So  far  as  the  rent  results  from  differences  in  fertility,  it 
depends  on  the  maintenance  of  the  fertility.  If  the  fertile 
qualities  of  the  better  fields  are  not  restored  and  maintained, 
the  yield  on  the  once  better  land  would  fall  at  the  same  time 
that  cultivation  extended  to  the  poorer  land.  Rent  may, 
however,  in  some  cases  result  from  mere  advantage  of  location 
as  population  extends. 

When  a  change  in  the  relative  quantity  of  land  (or  other 
agents)  occurs  that  imputes  to  labor  less  bountiful  results,  it 
is  a  case  of  decreasing  returns ;  a  change  in  the  opposite  direc- 
tion (through  discovery,  opening  of  new  lands,  increase  of 
agents,  etc.)  is  a  case  of  increasing  returns. 

§  8.  Law  of  increasing  and  decreasing  returns.  The 
law  of  increasing  and  decreasing  (or  diminished)  returns 
may  be  thus  stated.  The  amount  attributable  to  the  labor 
element  of  a  whole  population  varies  with  the  amount  and 
efficiency  of  the  material  agents  at  the  disposal  of  labor, 
increasing  if  they  increase  more  rapidly  than  population, 
and  decreasing  if  the  population  increases  more  rapidly  than 
they  do.  It  is  one  aspect  of  the  law  of  proportionality  as 
applied,  not  to  a  private  enterprise,  but  to  the  relation  of  the 
whole  population  to  its  resources.  The  law  of  decreasing  re- 
turns received  a  name  first,  and  the  term  has  been  loosely  ap- 
plied to  many  very  different  problems.^  It  was  first  used  in 
England  about  1815  with  reference  to  land  in  agriculture  un- 
der steadily  increasing  intensity  of  cultivation  of  the  soil  year 

8  See  note  at  end  of  chapter  on  Various  meanings  of  diminishing  re- 
turns. 


4Sd  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Pt.  VI 

by  year  in  order  to  get  more  food  per  acre.  It  was  called  the 
law  of  * '  the  decreasing  returns  of  capital  and  labor  as  applied 
to  land."  The  course  of  events  in  England  called  attention 
to  the  subject.  Population  was  growing  rapidly,  and  there 
was  need  for  more  food.  During  much  of  the  time  from 
1793  to  1815  England  was  at  war,  and  it  was  hard  to  obtain 
food  from  abroad.  The  English  farmers,  tempted  by  the 
higher  prices,  took  poorer  lands  (marshy,  cold  clay,  infer- 
tile) into  cultivation  and  sought  to  get  larger  crops  from 
the  older  fields.  This  took  more  labor  per  acre,  and  yielded 
a  larger  total  product,  but  less  per  day's  labor.  Grain  and 
other  produce  rose  in  price,  land  rents  and  land  values  in- 
creased, wages  fell,  and  therefore  the  peasant's  day  of  labor 
bought  less  food  than  before.  The  worst  period  of  all  for 
high  wheat  prices  was  from  1800  to  1813 ;  the  year  of  highest 
recorded  annual  average  price  was  1812,  $3.80  a  bushel.  It 
was  a  lesson  in  dynamic  economics  on  a  large  scale. 

§  9.  Increasing  returns  in  the  nineteenth  century. 
Other  forces  were  at  work  to  create  better  dynamic  conditions 
in  western  Europe.  The  great  war  ended  in  1815  and  wheat 
prices  in  England  fell  to  a  much  lower  level  by  1822."  This 
level  was  nearly  maintained  in  English  markets  until  1877. 
Then  again  was  a  great  fall  to  the  lowest  point  in  1894. 
Returns  in  agriculture  after  1815  were  on  the  whole  in- 
creasing until  1894.  Accordingly,  a  day's  common  labor  ex- 
changed for  more  food  than  before.  Population  grew,  but 
still  improved  methods  of  agriculture  produced  more  with 

»  Wheat  Pbices,  Annual  Average  in  England 

Average 
price  per 
Period  of  bushel 

Highest  prices 14  yrs.,  1800-1813                      $2.76 

Lower  prices 8  yrs.,  1814-1821  2.25 

Still  lower  prices   56  yrs.,  1822-1877  1.65 

Rapidly   falling   prices    6  yrs.,  1878-1883  1.33 

Lower   prices    9  yrs.,  1884-1802  .98 

Lowest   prices    14  yrs.,  1893-1906  .82 

Rising  prices  7  yrs.,  1907-1914         (about)   1.00 


Ch.  34]        DECREASING  AND  INCREASING  RETURNS  437 

less  labor.  Methods  of  transportation  improved  and  the 
additional  food  was  imported  instead  of  being  produced 
by  very  intensive  cultivation  of  the  limited  area  of  Eng- 
land. After  the  forties  a  great  Irish  emigration  actually 
reduced  year  by  year  the  total  population  of  Ireland. 
Methods  of  production  outside  of  agriculture  were  at  the 
same  time  improving,  and  real  wages  almost  steadily  rose  in 
western  Europe  throughout  the  nineteenth  century.  The 
great  fall  in  wheat  prices  as  measured  in  the  markets  of 
Liverpool  from  1878  to  1894  which  bankrupted  many  farmers 
and  reduced  agricultural  land  values  in  the  eastern  United 
States  and  in  western  Europe,  brought  cheap  food  to  the 
people.  It  was  a  period  of  increasing  returns  in  agricul- 
ture, as  an  actual  historical  fact.  It  is  a  question  whether 
that  period  did  not  come  to  an  end  about  1895,  the  growth 
of  population  in  the  international  food  markets  of  Europe 
and  America  having  overtaken  the  increase  of  command  over 
agricultural  lands  and  brought  us  again  into  a  period  of 
decreasing  returns. 

§  10.  Rhythmic  changes  of  population.  Changes  in  pop- 
ulation are  constant.  Until  recently  these  changes  have  gener- 
ally been  of  a  rhythmic  nature.  Again  and  again,  in  the 
history  of  savage  races,  the  failure  of  a  single  crop,  war,  or  a 
plague  would  reduce  a  population  in  a  few  years  much  below 
a  former  level.  This  loss  usually  would  be  recovered  within 
the  next  one  or  two  generations.  An  enormous  loss  of  popu- 
lation, however,  such  as  that  from  the  Black  Plague  in  Eng- 
land in  the  fourteenth  century,  might  rarely  cause  returns 
to  the  laborer  to  increase  so  greatly  that  the  effects  were  not 
lost  for  a  century.  War,  invasion,  immigration,  would  re- 
duce or  add  to  the  population  of  each  country,  yet  on  the 
whole  the  density  of  population  would  continue  on  about  the 
same  level  from  century  to  century.  Good  rulers  and  bad 
came  and  went  and  the  education  varied  above  and  below  a 
certain  average.  The  amount  of  rainfall  in  some  localities  or 
in  whole  countries  rises  and  falls  in  a  pretty  regular  cycle 


438  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Px.VI 

of  eight  to  ten  years,  more  or  less,  causing  food  supplies  to 
vary,  as  in  the  seven  fat  years  and  the  seven  lean  years  of 
biblical  Egypt.  The  conditions  for  special  crops,  such  as 
frost,  snow,  sun,  cloudiness,  hail,  vary  from  year  to  year ;  and 
many  insect  pests  run  in  cycles  alternating  with  the  insects' 
food  supply  and  parasitic  enemies.  In  a  larger  view  the  rise 
of  labor-incomes  that  resulted  from  the  opening  of  America 
and  with  the  agricultural  improvement  of  the  last  century 
may  prove  to  be  only  rhythmic,  not  cumulative.  In  so  far 
as  a  rapid  increase  of  population  results,  incomes  are  again 
lowered  toward  the  former  level. 

§  11.  Cumulative  dynamic  economy.  The  growth  of 
population  in  European  and  American  countries  in  the  past 
hundred  years  has  gone  steadily  onward,  not  canceled  by 
losses.  The  addition  made  to  numbers  (tho  not  necessarily  a 
further  continuation  of  the  growth)  is  at  least  for  a  long 
period  to  come,  a  permanent  fact.  The  movement  is  doubt- 
less partly,  but  not  wholly,  rhythmic,  and  if  a  future  decrease 
comes  it  is  likely  to  result  from  different  causes.  This  growth 
of  population  has  gone  along  with  other  changes  of  an  equally 
enduring  character.  Of  this  kind  is  the  great  increase  of 
area  open  to  settlement  by  the  advanced  industrial  peoples, 
the  permanent  displacement  on  a  whole  continent  of  the  sav- 
age, hunting  economy  and  its  inefficient  methods  of  food  pro- 
duction— the  improvement  of  transportation  opening  up  new 
sources  of  materials  and  foods  to  the  older  countries,  and  the 
rapid  consumption  of  our  supplies  of  timber,  coal,  and  other 
mineral  resources  for  which  substitutes  are  difficult  if  not 
impossible  to  find. 

§  12.  Individual  and  general  adjustment  to  static  condi- 
tions. In  every  economic  situation  there  is  involved  an  equi- 
librium of  values  and  prices.  It  is  the  theoretically  correct 
set  of  prices  and  incomes — not  what  we  might  wish  to  see  but 
what  logically  results  from  the  presence  of  men,  desires,  and 
goods  as  they  are.  In  this  equilibrium  and  in  the  movements 
bringing  it  about,  there  are  two  kinds  or  aspects  of  adjust- 


Ch.  34]        DECREASING  AND  INCREASING  RETURNS  439 

ment  to  be  observed,  the  individual  adjustment  and  the  gen- 
eral adjustment.  Each  individual,  it  may  be  assumed,  moves 
toward  the  occupation  that  (as  conditions  are,  which  he  can 
not  alter)  offers  him  the  best  return  (theory  of  wages),  and 
uses  his  agents  (theory  of  usance)  so  that  they  give  the  best 
return  he  knows  how  to  obtain.  If  no  new  force  is  intro- 
duced and  existing  forces  are  permitted  to  work  themselves 
out,  a  static  equilibrium  will  result  and  will  continue  un- 
changed. The  principle  of  proportionality  would  apply  to  all 
the  combinations  of  factors  in  this  equilibrium.  At  the  pre- 
vailing prices  and  with  the  prevailing  methods,  so  much  labor 
of  a  certain  kind  should  be  used  with  so  many  agents  of 
various  kinds.  If  either  more  or  less  of  any  factor  is  used, 
the  result  is  a  product  of  less  value  for  the  costs  and  hence 
yielding  a  smaller  profit  (theory  of  profits).  If  a  new  method 
or  a  new  proportion  is  found  to  be  better,  this  is  a  new  dy- 
namic element.  But  if  the  theoretic,  static  equilibrium  has 
been  attained,  there  is  no  chance  to  increase  the  yield  except 
when  correcting  a  previous  error  by  which  the  ideal  adjust- 
ment was  missed.  The  individual  having  found  what  seems 
the  best  adjustment  has  only  to  hold  steadily  to  it. 

Underlying  each  individual's  adjustment  is  the  general  ad- 
justment of  prices  and  yields.  Under  these  conditions  not 
only  this  workman  but  all  like  workmen  can  get  such  an 
amount  of  real  wages ;  not  only  this  bushel  of  wheat  and  bale 
of  cotton  bring  the  price,  but  all  other  like  units  do  the  same ; 
not  only  this  acre  of  land,  but  all  other  like  acres  of  land  will 
have  equal  values  and  uses.  The  individual  in  making  his 
adjustment  is  simply  trying  to  get  into  line  with  the  general 
situation,  to  find  his  true  place  on  the  various  levels  of  prices 
made  possible  by  the  totality  of  conditions. 

§  13.  Adjustment  to  dynamic  forces.  In  a  dynamic  situ- 
ation the  adjustment  still  has  the  two  aspects.  The  individual 
workman,  the  passive  capitalist,  and  the  enterpriser  are  all 
endeavoring  to  attain  to  an  ideal  adjustment  inherent  in  the 
new  situation.    We  have  already  seen  in  many  connections 


440  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Pt.  VI 

and  in  many  examples  how  profits  and  losses  multiply  in  dy- 
namic conditions."  Every  dynamic  force  in  industry  unset- 
tles an  equilibrium,  makes  some  factor  more  or  less  plentiful, 
technically  efficient,  and  valuable.  The  new  ideal  adjustment 
must  be  made  quickly  and  correctly.  Sometimes  using  more 
of  a  factor  than  before  yields  a  larger  profit,  sometimes  using 
less  may  do  so.  The  general  adjustment  that  goes  on  in  dy- 
namic conditions  is  most  important  because  it  involves  not 
merely  the  change  of  this  or  that  personal  fortune,  but  the 
raising  or  lowering  of  the  real  incomes  for  whole  sections  and 
classes  of  the  population,  and  therefore  alters  the  general 
economic  welfare. 

Note 

Various  meanings  of  diminishing  returns.  The  chief  other  meanings 
given  to  the  phrase  law  of  diminishing  returns,  which  must  be  deemed 
to  be  more  or  less  confused  and  erroneous,  will  here  be  noted. 

It  is  confused  with  the  law  of  proportionality  or  with  the  law  of 
enterpriser's  cost,  especially  as  applied  to  the  use  of  land  in  agricul- 
ture. The  fact  that  a  farmer  can  not  profitably  employ  an  unlimited 
amount  of  labor  in  any  one  year  on  a  single  acre  is  said  to  be  due 
to  the  law  of  diminishing  returns.  A  like  application  of  the  term 
is  made  in  explaining  the  limitation  in  the  use  of  land  for  other  pur- 
poses, residence,  etc.  (see  above,  the  principle  of  proportionality,  ch.  12). 
This  application  is  still  further  extended  to  the  use  of  all  other  kinds 
of  agents.  Later  and  exacter  criticism  (notably  Edwin  Cannan,  in 
"Production  and  Distribution,"  1894)  has  discerned  that  more  than 
one  problem  is  involved  (which  he  called  technical  and  historical 
diminishing  returns).  In  our  view  there  are  at  least  three  distinct 
problems:  (1)  technical  proportion,  the  best  mechanical  or  physical 
combination;  (2)  profitable  proportion,  the  enterpriser's  best  com- 
bination of  factors  at  existing  prices;  (3)  diminishing  returns,  the 
social-economic  problem  of  the  relation  of  population  to  resources. 

The  converse  phrase,  law  of  increasing  returns,  is  applied  to  the 
economy  of  large  production,  especially  in  the  common  contrast  between 
manufacturing,  said  to  be  subject  to  the  law  of  increasing  returns,  and 
farming,  said  to  be  subject  to  decreasing  returns.  There  is  error  here 
at  every  point.  The  manufacturing  enterprise  as  it  grows  is  assumed 
to  enlarge  the  area  of  land,  as  it  is  needed  (problem  of  investment  in 


•  See  ch.  27,  sec.  13,  note. 


Ch.  34]         DECREASING  AND  INCREASING  RETURNS  441 

large  production),  whereas  the  farm  is  taken  as  a  fixed  area  (problem 
of  proportionality).  This  appears  to  have  been  first  clearly  pointed  out 
by  J.  R.    Commons  in  his  "Distribution  of  Wealth,"  1895. 


CHAPTER  35 

BASIC  MATERIAL  RESOURCES:  THEIR  USE, 
CONSUMPTION,  AND  CONSERVATION 

1 1.  Changes  in  the  land  supply.  §  2.  New  land  supplies  by  means  of 
drainage  and  irrigation.  §  3.  Abuse  of  agricultural  land.  §  4.  Means 
of  restoring  lost  fertility.  §  5.  Land  for  products  other  than  food. 
§  6.  Destruction  of  the  natural  forests.  §  7.  Rapid  consumption  of  coal. 
§  8.  Disappearance  of  mineral  stores.  §  9.  Civilization's  consumption  of 
earth's  stores.  §  10.  Land  as  a  site  for  residence,  commerce,  and  manu- 
facture. §  11.  Production  of  usable  land  surface  in  cities.  §  12.  Dura- 
tive  character  of  hydraulic  power  sites.  §  13.  Goods  varying  in  in- 
creasableness. 

§  1.  Changes  in  the  land  supply.  The  greatest  dynamic 
movements  in  industry  of  modern  times  have  been  caused 
by  rapid  changes  in  "the  land  supply,"  that  great  complex 
of  area,  fertile  soil,  timber,  mineral  resources,  etc.  This 
seems  paradoxical,  for  "land,"  "nature,"  seems  to  be  the  one 
thing  (or  great  group  of  things)  which  is  fixed  in  amount. 
But  the  economic  supply  is  that  which  is  available  in  a  mar- 
ket. Land  in  Venus  or  Mars  is  of  no  economic  importance  to 
us,  but  lands  on  the  earth  as  yet  undiscovered  or  unavailable 
are  a  potential  supply  that,  under  certain  conditions  of  price 
and  of  technic,  may  be  realized. 

The  discovery  of  new  trade-routes  and  of  new  continents 
in  the  fifteenth  century  had  immediate  economic  effects  upon 
Europe,  but  these  began  to  be  more  largely  felt  as  actual  set- 
tlement on  these  sparsely  settled  lands  progressed  in  the  seven- 
teenth and  eighteenth  centuries.  Pioneers  from  the  most  ad- 
vanced peoples  in  the  world  moved  on  to  take  up  these  areas 
occupied  only  by  small  hunting  tribes,  and  to  use  them  by 
modern  agricultural  methods.    They  overcame  the  first  great 

442 


Ch.  35]  BASIC  MATERIAL  RESOURCES  443 

difficulty  of  distance,  dread,  and  mystery;  they  faced  and 
overcame  the  danger  from  savages  and  wild  beasts;  they 
cleared  the  forest,  opened  paths  and  highways,  and  enlarged 
the  supplies  of  new  and  fertile  lands.  They  made  these 
lands  available  to  help  supply  many  of  the  needs  of  the  older 
countries,  just  as  if  the  areas  of  Europe  had  been  in- 
creased. 

The  greatest  change  came  in  the  middle  of  the  nineteenth 
century  with  the  use  of  steamships  and  the  rapid  building  of 
railroads  in  the  western  states  of  America.  This  had  an 
effect  upon  England  and  western  Europe  identical  in  nature 
with  that  which  would  have  been  produced  had  an  area  touch- 
ing Europe  risen  out  of  the  ocean.  Every  country  in  Europe 
has  repeatedly  felt  the  shock  of  these  great  economic  changes 
which  have  lowered  the  price  of  nearly  all  kinds  of  their 
landed  wealth.  Because  of  increasing  population  (about 
1860-1890)  the  need  of  land-uses  was  increasing  very  rapidly, 
but  the  supply  of  land-uses  increased  so  much  more  rapidly 
that  it  caused  the  lowering  of  the  value  of  the  older  lands  in 
the  eastern  states  of  America  and  throughout  Europe,  the 
entire  abandonment  of  some  lands  for  agricultural  purposes, 
and  the  neglect  to  repair  and  maintain  a  large  part  of  the 
remainder. 

The  rate  of  this  movement  was  more  rapid  in  the  nineteenth 
century  than  it  ever  had  been,  and  perhaps  more  rapid  than 
it  will  be  again ;  but  in  some  measure  such  developments  will 
continue  for  a  long  period.  The  land  in  America  for  cen- 
turies was  not,  but  now  has  become,  for  some  purposes,  a  part 
of  the  supply  in  the  same  market  as  the  land  of  England. 
The  land  in  Greenland  is  not,  and  probably  never  can  be,  an 
important  part  of  the  supply  of  land  in  the  world;  but  the 
tropical  lands  will  doubtless  contribute  increasingly  to  the 
supplies  of  food  and  materials  used  in  the  temperate  zones. 

§  2.  New  land  supplies  by  means  of  drainage  and  irriga- 
tion. The  habitable  globe  has  now  been  fully  explored  and 
there  are  no  more  agricultural  lands  to  discover.    There  are, 


444  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Px.  VI 

however,  great  areas  almost  unusable  in  their  natural  states 
that  can  be  made  to  blossom  if  properly  improved.  The 
greatest  possibilities  of  this  kind  are  in  drainage  and  in  irri- 
gation. The  improvements  consist  in  insuring  just  that 
amount  of  water  needed  for  cultivated  crops. 

Large  areas  of  damp  lands,  or  those  covered  with  swamps, 
lakes,  or  shallow  arms  of  the  sea,  may  be  made  usable  if  the 
surplus  water  can  be  removed.  In  England  in  the  eighteenth 
century  the  drainage  of  the  fens  in  the  eastern  counties 
marked  a  new  era  in  agricultural  progress.  It  is  estimated 
that  16,000,000  acres  have  been  reclaimed  in  the  United 
States,  principally  in  the  states  of  the  Mississippi  Valley,  and 
most  of  the  soil  thus  made  available  to  the  plow  is  of  unsur- 
passed fertility.  The  areas  of  fens,  swamps,  and  marshlands 
still  remaining  to  be  drained  comprise  about  75,000,000  acres, 
being  about  4  per  cent  of  the  area  of  the  country.  This  would 
add  nearly  one  fifth  to  the  improved  farm  area  (in  1908).^ 
Tile  underdraining  of  wet  lands  is  a  very  enduring  sort  of 
improvement  which  is  being  made  on  many  thousands  of  acres 
yearly.  The  most  extensive  w^ork  of  drainage  in  the  world  is 
that  of  Holland,  where  a  large  part  of  the  surface  has  been 
won  from  the  sea.  A  striking  feature  of  this  case  is  that 
there  is  the  unceasing  need  of  lifting  to  the  level  of  the  ocean 
by  means  of  windmills  and  pumps  the  natural  run-off  of 
rain.  Among  the  larger  drainage  undertakings  in  Holland 
was  the  draining  of  the  Haarlem  Lake  in  1840-58,  by  which 
40,000  acres  of  rich  land  were  made  available,  and  the  more 
recent  draining  of  Zuyder  Zee,  which  added  1,300,000  acres. 

Irrigation  seeks  to  supply  water  to  the  thirsty  land.  It  is 
probable  that  no  modern  irrigation  work  (unless  it  be  that  of 

1  National  Conservation  Commission  Report,  1908-09,  Doc.  Cons.  No. 
5399,  p.  373.  Of  the  75,000,000  acres  about  two  thirds  are  in  the  south- 
ern states,  Florida  having  about  18,000,000,  Louisiana  10,000,000  and 
other  states,  Mississippi,  Arkansas,  Georgia,  North  Carolina,  South 
Carolina  and  Texas,  ranging  from  6,000,000  down  to  1,600,000  acres. 
Over  two  thirds  of  the  rest  is  in  the  group  of  contiguous  states,  Indiana, 
Michigan,    Wisconsin,   Minnesota,    Illinois,    Missouri. 


Ch.  35]  BASIC  MATERIAL  RESOURCES  445 

ihe  recent  Assouan  Dam  in  Egypt)  equals  that  which  once 
was  done  on  the  now  desert  lands  between  the  Euphrates  and 
the  Tigris.  The  opportunities  for  irrigation,  however,  in 
America  with  its  great  central  desert  west  of  the  one  hun- 
dredth degree  of  longitude,  are  enormous.  Already  large 
works  have  been  built  by  the  government  and  by  private 
enterprise,  irrigating  13,000,000  acres,  but  the  national  and 
state  governments  and  private  enterprise  are  entering  upon  the 
task  on  a  scale  never  before  attempted.  It  is  estimated  that 
the  total  area  that  may  some  time  economically  be  irrigated  is 
about  45,000,000  acres,  enough  for  nearly  a  million  fifty-acre 
farms.2 

§  3.  Abuse  of  agricultural  land.  The  forces  acting  upon 
the  land  supply  do  not  all  work  in  the  same  direction.  The 
land  supply  shrinks  on  some  sides  while  it  grows  in  others. 
The  effects  of  bad  husbandry  are  everywhere  in  the  world 
apparent,  and  in  many  regions  fertile  fields  have  been  phys- 
ically and  economically  destroyed.  In  Asia,  lands  that  once 
supported  millions  of  people,  perhaps  tens  of  millions, 
are  now  deserts.  Egypt,  for  a  time  reduced  to  a  semi-desert 
condition,  has  only  in  the  past  century  been  restored  to  a 
certain  extent  by  the  use  of  new  methods  and  a  return  to  the 
old  ones.  Many  of  the  areas  that  were  the  granaries  of  Rome 
can  now  hardly  support  a  sparse,  half-starving  population. 
The  land  surface  remains,  but  some  of  the  elements  indis- 
pensable to  its  value  have  been  destroyed. 

Even  in  young  America  may  be  seen  the  effect  of  a  failure 
to  keep  land  in  repair.  As  the  new  rich  lands  of  the  West 
were  opened  up,  the  old  lands  in  the  East  were  allowed  to 
wear  out,  and  many  of  them  were  abandoned.  Increasing 
returns  marked  the  spread  of  the  frontier  westward.  On  the 
new  lands  in  turn  the  same  methods  were  followed,  using  up 
the  first  rich  store  of  fertility  with  no  attempt  to  keep  up  the 
quality  of  the  soil.     This  may  have  been  the  best  policy  for 

2  Report  of  National  Conservation  Commission  (1909).  Pub.  Doc. 
Consecutive  No.  5398,  p.  67.     Figures  for  1908. 


446  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Pt.  VI 

the  time;  it  would  not  have  been  economical  to  employ  Old 
World  methods  of  intensive  husbandry  when  such  rich  ex- 
tensive areas  were  being  opened  up.  The  resulting  harvests 
were  in  many  places  phenomenal;  in  the  valley  of  the  James 
River  in  Dakota  twenty  crops  of  wheat  were  taken  from  the 
same  lands  with  no  apparent  decrease,  and  in  the  black  bottom 
lands  of  Indiana  and  Illinois,  sometimes  overflooded,  enor- 
mous crops  of  corn  have  been  raised  still  longer  without  fer- 
tilizer. But  the  process  was  one  destructive  in  most  places 
of  the  natural  resources.  As  settlement  moved  westward, 
great  forests  fell  in  ashes,  and  the  soil  was  robbed  of  the 
fertile  elements  which  it  had  taken  centuries  for  nature  to 
store  up.  "What  was  happening  in  America  and  in  other  new 
lands  in  the  nineteenth  century  was  the  primitive  method  of 
exploitation  of  arable  lands  {Raiibhau,  robbery-tillage,  as  it 
is  expressively  called  in  German).  In  1908  there  were  nearly 
11,000,000  acres  of  abandoned  farm  lands  in  the  United 
States  and  about  4,000,000  acres  had  suffered  from  soil  erosion 
as  the  result  of  neglect.^ 

§  4.  Means  of  restoring  lost  fertility.  In  the  older  parts 
of  the  United  States,  as  in  the  older  countries,  methods  have 
long  been  employed  to  maintain  the  fertility  of  the  soil  by 
returning  or  increasing  certain  of  the  fertile  elements.  When 
by  neglect  of  fields  the  underlying  rocks  have  become  denuded 
of  their  covering  of  organic  materials,  the  process  of  restora- 
tion is  most  difficult,  slow,  and  costly.  The  mountain  sides 
have  been  stripped  of  forests,  and  the  fertile  soil  has  been 
washed  into  the  river  valleys  in  many  of  the  older  countries 
as  in  Greece  and  Italy,  and  in  many  parts  of  eastern  and 
southern  United  States.  Except  in  such  cases,  the  soil  is  a 
self-replenishing  agent,  and  if  allowed  to  lie  fallow,  will  slowly 
recover  its  fertility  in  whole  or  in  part  by  disintegration  of 
the  subsoil,  by  slow  wearing  away  of  the  infertile  surface, 
and  by  plant  action.  But  self-replenishing  of  soil  is  slow. 
It  takes  Nature  about  500  years  to  create  one  inch  of  fertile 

a  Report  of  the  Conservation  Commission,  vol.  1,  p.  78. 


Ch.  35]  BASIC  MATERIAL  RESOURCES  447 

top-soil.  "When  the  use  of  the  land  is  needed,  Nature's  way 
is  costly,  for  it  costs  time. 

Other  ways  are  quicker.  Stable  manures  and  garbage  can 
be  hauled  from  near-by  towns;  seaweed  and  mineral  fertil- 
izers, such  as  phosphates  and  lime,  can  be  bought  and  applied. 
Subsoil  plowing  is  practised  to  make  available  new  layers  of 
soil  that  are  just  as  important  as  new  acres  added  to  the  sur- 
face. Leguminous  crops  like  peas  and  clover,  which  have  the 
power  of  extracting  nitrogen  from  the  air,  are  cultivated,  and 
either  plowed  under  or  fed  to  animals  in  the  fields.  If  the 
roots  of  such  plants  are  inoculated  with  bacteria  their  nitro- 
gen-making power  is  greatly  increased.  The  progress  of  sci- 
ence and  of  skill  in  agriculture  is  going  far  to  maintain 
present  food  areas  on  the  average  in  undiminished  efficiency. 
In  many  respects  the  productivity  of  land  may  be  even  fur- 
ther increased.  If  we  did  not  have  to  reckon  on  a  great 
increase  of  population  in  the  world,  the  problem  of  a  continu- 
ing supply  of  land  to  grow  food  would  be  a  relatively  minor 
one. 

§  5.  Land  for  products  other  than  food.  The  problem  of 
the  supply  of  agricultural  land  is  first,  and  most  often,  thought 
of  in  connection  with  the  supply  of  staples  like  corn  and  wheat 
used  for  food.  But  it  relates  also  to  the  supply  of  all  other 
orsranic  materials  that  have  to  be  constantly  produced,  such 
as  teas,  coffee,  spices,  fruits,  sugar,  etc.;  meats,  fats,  hides, 
bones,  feathers,  bristles,  etc.,  from  cattle,  swine,  sheep,  or 
poultry ;  materials  for  textiles,  as  flax,  linen,  cotton,  including 
those  that  must  be  obtained  by  the  use  of  animals,  as  is  the 
case  with  silk  and  wool;  vegetable  oils,  as  cottonseed,  linseed, 
olive,  and  turpentine;  animal  oils,  as  lard,  tallow;  and  thou- 
sands of  other  materials.  Each  of  these  kinds  of  goods  has  its 
own  peculiar  need  of  area  and  fertility,  and  its  peculiar  in- 
fluences on  the  maintenance  or  exhaustion  of  the  soil.  Each 
must  be  separately  studied,  and  thus  has  developed  in  each 
natural  science  its  economic  department — economic  geology, 
industrial  chemistry,  economic  botany,  economic  zoology  and 


448  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Px.  VI 

its  more  special  branches,  called  economic  entomology,  eco- 
nomic ornithology,  etc.  In  the  case  of  many  organic  prod- 
ucts the  amount  available  promises  to  continue  adequate  for 
the  needs  of  the  future ;  in  the  case  of  others,  scarcity  makes 
itself  much  more  quickly  felt. 

§  6.  Destruction  of  the  natural  forests.  The  forests  have 
been  used  with  less  regard  for  future  uses  than  have  agricul- 
tural lands.  Moreover,  a  conservative  policy  with  regard  to 
forests  has  been  more  tardily  adopted,  because  the  necessity  of 
it  was  more  tardily  brought  home  to  men.  To  the  barbarians 
of  Roman  times,  sparsely  peopling  the  lands,  and  with  few 
uses  for  timber,  the  primeval  forests  of  Europe  must  have 
seemed  as  certainly  renewable  as  the  waters  of  the  rivers  or 
as  inexhaustible  a  stock  as  the  sand  of  the  seashore.  Left  a 
century  untouched  by  man,  any  land  once  naturally  covered 
with  trees  would  revert  to  a  state  like  that  of  the  primeval 
forest.  Under  the  economic  conditions  of  barbaric  times  the 
forests  were  self-replenishing  sources  of  supply.  They  ceased 
to  be  so,  in  full  measure,  as  population  increased.  The  con- 
sequent curtailment  of  the  rights  of  peasants  to  the  free  use 
of  wood  began  to  cause  social  and  political  troubles  early  in 
the  Middle  Ages.  Until  the  eighteenth  century  scarcely  any 
systematic  beginning  was  made  in  the  cultivation  of  the  forest 
growth.  Until  a  few  generations  ago  in  European  countries, 
and  until  the  present  moment  in  most  parts  of  America,  tim- 
ber has  been  cut  with  no  attempt  to  maintain  an  undiminished 
stock. 

Germany  and  France  began  in  the  eighteenth  century  to 
turn  attention  to  systematic  forest  culture,  but  England,  with 
exceptional  transportation,  could  more  cheaply  get  timber 
from  Norway  and  from  North  America.  The  magnificent 
forests  of  America  were  a  source  of  ready  income  to  the  set- 
tlers, affording  immediately  saleable  exportable  goods  in  the 
form  of  ship  timber,  masts,  shingles,  staves,  pitch,  and  tur- 
pentine. A  bountiful  supply  of  lumber  has  always  been  a 
large   element  in   the   prosperity   of  the   American  people. 


Ch.  35]  BASIC  MATERIAL  EESOURCES  449 

From  the  first  settlement  to  the  present,  the  use  of  the  for- 
ests for  lumber  has  speedily  grown.  To  the  settlers  much  of 
the  forest  was,  however,  a  real  hindrance  to  agriculture. 
"While  great  quantities  of  wood  were  used,  still  greater  quan- 
tities were  wasted,  trees  being  girdled,  the  ground  burned 
over,  the  timber  destroyed  in  any  way  that  would  clear  the 
soil — timber  which  to-day  would  be  of  far  more  value  than 
is  the  cleared  land  on  which  it  stood.  Such  methods  met  the 
immediate  need,  but  considering  present  conditions,  the  labor 
was  worse  than  thrown  away. 

Our  forests  once  covered  45  per  cent  of  the  land  area  of  the 
United  States  and  even  now  they  cover  25  per  cent.  The 
yearly  growth  of  12  cubic  feet  per  acre  equals  less  than  one 
third  of  the  annual  consumption  (40  cubic  feet).  "We  take 
260  cubic  feet  per  capita,  while  Germany  uses  37  cubic  feet, 
and  France  25  cubic  feet." 

The  supplies  of  lumber  must  be  sought  on  the  very  margins 
of  our  territory :  Florida,  Maine,  northern  Michigan  and  Wis- 
consin, Washington,  and  Oregon,  some  of  which  supplies  are 
so  distant  from  the  densely  populated  states  as  to  be  almost 
unavailable  on  account  of  the  cost  of  transportation.  Pro- 
fessor Marsh,  as  long  ago  as  1864,  characterized  the  policy  that 
had  been  thus  far  pursued:  "We  are  breaking  up  the 
foundation  timbers  and  the  wainscoting  of  the  house  in  which 
we  live  in  order  to  boil  our  mess  of  pottage." 

The  indirect  effects  of  these  changes  are  fully  as  great  as 
the  direct  ones.  Forests  greatly  affect  climate,  temperature, 
and  soil;  they  influence  the  humidity.  They  equalize  the 
flow  of  streams,  moderate  the  floods,  and  by  preventing  the 
washing  down  of  the  rich  soil,  keep  the  mountain  sides  from 
becoming  bare  and  sterile  rocks.  So,  near  the  end  of  the 
nineteenth  century,  the  people  in  America  began  most  tardily 
to  think  of  forestry.  Of  our  forests  remaining,  one  fifth  are 
still  in  public,  and  four  fifths  are  in  private  ownership.  The 
purpose  of  scientific  forestry  is  to  make  forest  lands  per- 
manent  use-bearers,    durative   agents,   to   make   them   yield 


460  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Pt.  VI 

not  a  single  crop  of  timber,  but  an  unending  series  of 
crops. 

§  7.  Rapid  consumption  of  coal.  With  care,  the  use  of 
agricultural  and  of  forest  lands  may  be  durative;  but  the 
extraction  of  coal  is  a  purely  consumptive  use  of  the  mine. 
Every  ton  used  to-day  is  subtracted  from  the  supplies  for 
future  generations.  The  coal  deposits  in  the  earth  have  only 
recently  been  drawn  upon.  A  modern  town  with  a  few  thou- 
sand inhabitants  probably  uses  to-day  a  greater  quantity  of 
coal  than  was  used  in  all  Europe  two  centuries  ago.  The 
large  deposits  of  coal  in  England  and  their  early  development 
long  gave  to  English  industry  a  great  advantage  over  other 
countries.  In  England,  however,  has  first  been  felt  the  fear 
of  the  exhaustion  of  the  coal  supply.  Professor  Jevons,  in 
1865,  sounded  the  note  of  alarm;  he  prophesied  that  because 
the  coal  deposits  in  America  were  many  times  as  great  as 
those  of  England,  industrial  supremacy  must  inevitably  pass 
to  America.  Already  the  supremacy  in  coal  and  iron  produc- 
tion has  passed  to  America,  and  that  in  many  other  industries 
where  fuel  is  an  important  element  in  cost  soon  will  come. 
In  England  the  accessible  supply  of  coal  is  limited,  deeper 
shafts  must  be  sunk,  and  tunnels  extended  far  under  the  ocean 
bed,  and  the  coal  got  with  greater  difficulty  and  at  greater  ex- 
pense. Coal  has  risen  in  price  in  England  within  the  last 
few  years,  and  will  continue  to  rise  in  the  future.  The  coal 
deposits  of  America  have  been  estimated  to  be  thirty-seven 
times  as  great  as  those  of  England,  but  many  of  the  best 
American  mines  show  signs  of  diminution.  The  best  anthra- 
cite beds  will  be  gone  in  less  than  three  quarters  of  a  century. 
And  yet  there  is  in  America  little  thought  of  the  future  in 
this  regard. 

§  8.  Disappearance  of  mineral  stores.  There  are  many 
other  natural  materials  which,  now  that  the  exploration  of 
the  earth's  surface  is  pretty  well  completed,  appear  to  form 
a  limited  and  unincreasable  stock.  Their  gradual  consump- 
tion is  making  and  will  make  great  changes  in  the  economic 


Ch.  35J  BASIC  MATERIAL  RESOURCES  451 

world.  Natural  gas  is  a  wonderful  substitute  for  coal,  and 
when  first  found  in  a  locality  it  brings  a  brief  prosperity,  but 
it  is  soon  exhausted.  Petroleum,  little  used  before  1865,  will 
help  light  the  world  for  but  a  few  decades,  for  it  is  drawn 
from  natural  reservoirs  slowly,  if  at  all,  replenishing.  The 
recent  increase  in  the  use  of  gasoline  for  motor-vehicles  has 
directed  thought  to  the  limits  of  possible  supply.  Iron 
ore,  the  most  essential  single  mineral  resource,  has  been  taken 
from  the  earth  in  greater  quantities  within  the  last  fifty  years 
than  altogether  before  in  the  history  of  the  globe,  and  the 
limits  of  rich  accessible  supplies  in  the  United  States  are 
already  in  sight.  China  may  be  the  next  great  center  of  iron 
and  steel  production.  Copper,  tin,  lead,  gold,  silver,  and 
potter's  clay  are  a  limited  stock,  inadequate  to  increasing 
needs.  When  any  deposit  has  been  worked  out,  the  aban- 
doned quarry,  mine,  or  claybank  is  most  often  useless  for 
any  other  purpose. 

Some  of  these  materials  are  made  available  more  than  once 
through  the  useful  services  of  the  junk  man.  New  processes 
are  devised  for  extracting  metals  from  lower  grade  ores  which 
before  were  worthless.  Sometimes  a  good  substitute  is  found, 
such  as  aluminum,  which  gives  many  of  the  same  uses  as  iron 
and  copper  and  which  can  be  extracted  from  clay  by  the  use 
of  electricity  generated  by  a  waterfall.  This  would  promise 
an  almost  inexhaustible  quantity,  but  as  yet  obtainable  only 
at  high  cost.  Many  other  substitutes  will  doubtless  be  dis- 
covered, but  the  outlook  in  some  directions  has  little  promise. 

§  9.  Civilization's  consumption  of  the  earth's  stores. 
There  is  a  striking  contrast  between  the  modes  in  which  the 
earth's  surface  is  utilized  by  modern  man  and  by  his  an- 
cestors. The  savage  uses  the  fruits  that  he  finds,  and  those 
fruits  are,  almost  without  exception,  renewed  the  next  year. 
The  earlier  civilizations  did  not  go  deep  enough  into  natural 
resources  to  use  up  permanently  the  world  in  which  they 
lived.  The  only  mines  that  were  worked  out  under  the  great 
ancient  empires  were  gold  and  silver  mines,  while  the  mines 


462  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [PT.Vr 

of  heavier,  useful  metals  were  touched  but  lightly.  But  from 
the  eighteenth  century  the  earth's  crust  has  been  exploited 
at  an  ever-accelerating  rate.  Scientific  knowledge  and  me- 
chanical improvement  have  combined  to  unlock  the  store- 
houses of  the  Geologic  Ages.  If  this  movement  continues, 
many  important  materials  must  be  exhausted  in  the  not  far 
distant  future. 

§  10.  Land  as  a  site  for  residence,  commerce,  and  manu- 
factures. Probably  the  most  durative  of  all  economic  agents 
is  solid  land-surface  used  solely  for  standing  room.  Yet  geol- 
ogy reveals  that  every  part  of  the  earth 's  crust  has  been  under 
the  ocean,  some  of  it  many  times.  Every  part  of  the  world's 
surface  is  more  or  less  rising  or  falling,  changes  within  his- 
toric times  having  been  enough  to  depress  and  again  elevate 
large  stretches  of  sea  coast.  Slight  earthquake  shocks  are 
felt  in  nearly  every  part  of  the  habitable  globe.  Before  the 
end  of  man's  tenancy  on  the  globe  great  changes  will  take 
place  in  the  land  surface.  Not  only  San  Francisco,  but  New 
York,  may  some  day  sink  into  the  sea,  beneath  which  may  now 
lie  the  building  sites  of  the  future  metropolis.  But  these 
catastrophic  changes  are  rare,  and  the  slow  secular  changes 
hardly  enter  into  the  calculations  of  men.  * '  The  solid  earth ' ' 
is  the  synonym  of  the  everlasting  and  unchangeable.  Build- 
ing sites  for  residence  and  business  purposes — factories,  offi- 
ces, stores — are  the  purest  type  of  durative  agents  known  to 
us,  despite  the  occurrence  of  volcanic  eruption,  and  of  earth- 
quakes in  limited  districts,  and  of  intruding  waters  and 
crumbling  walls  almost  everywhere. 

The  covering  of  the  ground  with  dwellings  does  something 
to  protect  it  from  the  natural  wear  of  rain  and  winds,  as  do 
also  the  erection  of  stone  and  cement  walks,  the  planting  of 
trees,  the  diversion  of  streams,  and  many  other  safeguards. 
The  space  needed  for  existence  is  small.  With  a  density  of 
population  equal  to  that  of  the  most  CJ-owded  districts  in  the 
East  Side  in  New  York,  all  the  people  of  the  world  could  be 
housed  in  the  State  of  Delaware.     The  problem  of  residence 


Ch.  35]  BASIC  MATERIAL  RESOURCES  453 

land  is  to  get  ample  space  for  health  and  a  happy  life  con- 
veniently near  to  places  of  work,  where  man  can  earn  a  live- 
lihood. The  scarcity  appears  in  very  high  rents  for  the 
miserable  tenements  of  the  poor,  and  in  fabulous  prices  for 
residence  sites  in  the  fashionable  neighborhoods. 

Sites  for  manufacturing,  commerce,  banking,  and  trade  that 
are  conveniently  located  in  relation  to  workers,  to  consumers, 
and  to  transportation  facilities  for  raw  materials  and  finished 
products,  are  few  in  any  community.  Their  uses  are  highly 
valued.  Rapid  transit  by  producing  a  larger  supply  of  acces- 
sible sites  does  something  to  relieve  the  pressure  for  limited 
residence  land,  but  it  makes  possible  still  greater  pressure 
for  the  central  business  locations. 

§  11.  Production  of  usable  land  surface  in  cities.  The 
work  of  man  is  doing  much  by  form  changes  to  increase  the 
area  suitable  for  residence  and  business.  Large  districts  on 
the  river  fronts  of  New  York  are  filled  land.  The  larger  part 
of  the  most  valuable  lands  within  the  city  of  Boston  were 
once  tidewater  swamps,  which  have  been  filled  and  made 
usable  by  great  outlays.  Great  hills  have  been  dumped  into 
the  Bay  of  San  Francisco  to  convert  mud  flats  into  solid 
earth,  for  railroad  terminals  and  warehouses.  In  almost 
every  city  much  has  been  done  to  level  hillsides,  to  fill  val- 
leys, or  to  drain  swamps.  Along  many  picturesque  lakes  the 
steep  banks  for  miles  are  dug  with  pick  and  shovel  or  blasted 
with  dynamite,  and  dumped  over  into  the  water  to  make  level 
sites  for  cottages.  Wooden,  stone,  or  cement  retaining  walls 
are  built  so  that  the  debris  from  the  streams  and  the  sands 
washed  up  by  waves  may  be  retained  to  widen  the  solid  land. 
Suitable  places  for  docks,  warehouses,  and  factories,  and  other 
needs  of  commerce  and  industry,  are  created  on  the  shores  of 
navigable  waters.  The  engineer  in  tunneling  mountains  and 
building  roadbeds  over  marshes  or  along  swampy  riversides, 
or  in  digging  canals  between  rivers  or  between  oceans,  is  mak- 
ing the  kind  of  land  surface  suitable  to  the  uses  of  trans- 
portation and  trade.    It  is  characteristic  of  nearly  all  these 


454  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Pt.  VI 

artificially  altered  spaces  that  they  are  as  solid  and  enduring 
as  natural  formations  of  level  land,  and  are  subject  only  to  the 
slow  action  of  rain,  streams,  waves,  winds,  or  to  rare  up- 
heavals of  nature.  Man's  works  are  in  these  cases  as  enduring 
as  nature's. 

§  12.  Durative  character  of  hydraulic  power  sites.  The 
sources  from  which  man  has  as  yet  successfully  obtained 
power  are  domestic  animals,  winds,  falling  waters,  the  tides, 
and  heat  producing  materials  (wood,  coal,  oil,  etc.).  The 
winds,  while  inexhaustible  sources,  are  too  irregular  to  be  of 
the  greatest  importance.  Waterfalls  are  of  increasing  use 
with  the  progress  in  the  art  of  transmitting  power  in  the 
form  of  electricity.  The  maintenance  of  water-power  plants 
in  efficient  condition  calls  for  much  labor  on  the  banks  of  the 
millstream,  or  for  the  building  and  repairing  of  dams  and 
reservoirs,  of  pipes  and  of  water  wheels.  With  this  care, 
waterfalls  are  durative  in  a  high  degree.  The  supply  of 
power  from  water  is  capable  of  enormous  increase  through  the 
construction  of  reservoirs,  the  building  of  canals,  and  the 
economizing  of  great  sources  now  going  to  waste.  The  water- 
fall as  a  whole  is  permanent,  perennially  renewed  by  rains; 
but  the  energy  liberated  by  the  falling  water  is  consumed  each 
moment.  Because  of  this  natural  renewal  of  the  power,  a 
continuing  usufructuary  value  adheres  in  the  site  of  land 
whose  possession  gives  control  over  the  falling  water.  A  simi- 
lar view  is  to  be  taken  of  the  rare  sites  where  tidal  power  can 
be  economically  employed. 

§  13,  Goods  varying  in  increasableness.  It  has  long  been 
customary  for  economists  to  talk  of  economic  goods  that  could 
be  increased  indefinitely  (meaning  infinitely  or,  in  any  event, 
without  any  limit  ever  appreciable  to  man)  without  any  in- 
crease in  the  cost  or  scarcity.  This  class  of  goods  was  con- 
sidered  to  be  very  large.  There  is  no  such  class  of  economic 
goods;  it  is  impossible  that  there  should  be;  if  they  are 
"scarce,"  increasing  demand  must  make  them  scarcer,  except 
as  discoveries  and  improvements  increase  the  supply.    All 


Ch.  35]  BASIC  MATERIAL  RESOURCES  466 

kinds  of  wealth  are,  so  far  as  it  is  economical  to  do  so,  thus 
increased,  even  land  surface.  Many  kinds  in  the  course  of 
time  are  very  greatly  increased  with  little  or  no  direct  effort, 
but  the  supply  of  all  alike  can  be  secured  in  larger  amount 
at  any  given  moment  with  the  known  methods  and  tools  only 
with  increasing  difficulty.  The  different  forms  of  wealth  may 
be  ranged  on  a  scale  according  to  the  ease  with  which  they 
can  be  increased  by  effort.  They  may,  therefore,  be  classed 
as  relatively  fixed  and  relatively  increasable.  Some  natural 
resources  belong  at  one  end,  and  some  at  the  other  end  of 
this  scale,  and,  necessarily,  the  tools  and  appliances  made 
from  these  materials  must  likewise  range  between  the  ex- 
tremes. Except  as  form  and  place  changes  are  thus  limited 
by  elemental  materials  and  natural  sources  of  power,  the  out- 
look is  that  form  and  place  change  will  grow  constantly  more 
easy,  and  elementary  materials  constantly  more  difficult,  to 
obtain.  No  hard  and  fast  line  divides  the  different  kinds  of 
goods,  but  the  difference  in  degree  of  increasableness  is  a 
fact  of  great  social  importance,  affecting  the  direction  in 
which  industry  can  and  must  progress. 

The  difference  in  increasableness  of  the  various  forms  of 
wealth  is  of  importance  in  considering  various  social  ques- 
tions, such  as  the  effects  of  an  increase  of  population,  and  the 
kinds  of  taxation  most  equitable  and  most  favorable  to  the 
progress  of  society.  Account  must  be  taken  of  the  fact,  for 
instance,  that  the  number  of  bricks  can  be  increased  more 
easily  than  the  amount  of  land ;  but  there  must  not  be  over- 
looked the  possibility  of  increase  in  any  of  these  forms  of 
wealth,  nor  the  limits  to  the  increase  of  any  one  of  them. 


CHAPTER  36 
MACHINERY  AND  WAGES 

§  1.  Progressive  control  over  natural  conditions.  §  2.  Labor-saving 
invention  as  a  dynamic  factor.  §  3.  The  lump  of  labor  notion.  §  4. 
Evils  of  "the  industrial  revolution."  §  5.  Some  evils  of  the  introduction 
of  machinery.  §  6.  Loss  to  the  less  efficient  workers.  §  7.  Effect  of  ma- 
chinery in  different  industries.  §  8.  Beneficial  effect  of  machinery  upon 
wages.  §  9.  Dependence  on  abstinence.  §  10.  Grades  of  labor  and  gains 
from  machinery.     §  11.  Opposing  tendencies. 

§  1.  Progressive  control  over  natural  conditions.  Vari- 
ous stages  of  progress  in  human  history  have  been  recognized. 
First  is  the  stage  of  appropriation — the  stage  of  hunting,  or 
of  fishing,  or  of  gathering  the  spontaneous  fruits  of  the  fields. 
Man  in  this  stage  is  little  beyond  the  animal  in  his  economic 
methods ;  he  uses  some  tools  to  gather  what  nature  chances  to 
bring  forth,  but  he  does  not  guide  and  direct  the  natural 
processes.  The  limitation  to  man's  powers  in  this  stage  are 
marked.  There  is  excess  of  supply  and  waste  at  one  season, 
scarcity  and  great  suffering  at  another.  With  such  crude 
utilization  of  the  bounties  of  nature,  a  vast  area  will  support 
but  a  small  population.  When  sheep  and  cattle  have  been 
domesticated  and  where  there  is  a  large  area  for  grazing,  in- 
dustry rises  to  the  pastoral  stage.  While  still  dependent  on 
nature's  bounties  for  the  feeding  of  his  cattle,  man  is  hourly 
intervening  to  protect,  increase,  regulate,  and  improve  the 
flocks  and  herds  on  which  depends  his  supply  of  food  and 
materials.  Famines  are  more  rare,  economic  welfare  is 
greater,  a  larger  population  is  nourished  on  the  same  area, 
The  agricultural  stage  begins  whenever  man  tills  the  soil, 
plants  seeds,  and  increases  by  his  care  the  supply  of  vege- 
table food.    This  is  a  still  greater  intervention  in  the  course 

456 


Ch.  36]  MACHINERY  AND  WAGES  457 

of  nature.  Man  anticipates  the  future,  directs  forces,  and 
groups  materials  to  his  purpose  of  getting  a  regular  food- 
supply.  He  is  thus  forced  into  settled  life,  at  the  same  time 
improves  in  hand-production  of  commodities,  and  makes  fur- 
ther steps  in  commerce.  Then  gradually  comes  the  indus- 
trial stage,  in  which  control  over  nature  grows,  supplies 
increase,  machinery  and  motive  forces  are  utilized,  and  hu- 
manity is  in  the  full  tide  of  industrial  development.  Thus 
throughout  history  the  economic  progress  of  society  has  been 
marked  by  decreasing  dependence  on  the  bounties  and  chances 
of  nature  and  by  increasing  shaping  of  materials  and  control 
of  natural  forces  by  man.  There  are  no  sharply  marked 
changes,  but  there  is  a  growth  of  security,  of  certainty,  and 
of  productivity.  With  man's  increasing  power  and  fore- 
sight, the  element  of  chance  is  reduced. 

§  2.  Labor-saving  inventions  as  a  dynamic  factor.  For 
several  centuries,  accompanying  the  advance  of  the  natural 
sciences,  there  has  been  a  gradual  improvement  of  mechan- 
ical appliances  in  the  practical  arts  in  western  Europe  and 
America.  The  question  may  be  put  as  regards  the  simplest 
improvement  of  the  simplest  tools:  how  do  they  affect  the 
wages  of  the  workers?  The  question  took  a  dramatic  form 
when  power-using  machines  were  so  rapidly  introduced  in 
the  last  half  of  the  eighteenth  century  in  England. 

It  is  by  the  use  of  power  that  the  greatest  saving  of  labor 
can  be  effected.  Llachinery  is  applicable  in  very  different 
degrees  in  different  processes  and  industries.  In  many  in- 
dustries and  parts  of  industries,  machines  are  usable  only  in 
a  slight  measure,  indirectly,  or  not  at  all.  They  are  of  the 
least  assistance  in  the  personal  services,  and  in  the  immediate 
work  of  the  thinker,  the  teacher,  the  speaker,  and  the  artist. 
Agriculture  presents  conditions  of  difficulty  for  the  use,  in 
the  fields,  of  power  other  than  that  of  man  and  of  draft  ani- 
mals. Even  horse-drawn  gang-plows,  planters,  seeders,  mow- 
ers, reapers,  harvesters,  hay-loaders,  etc.,  to  be  used  profit- 
ably require  a  level  surface  and  a  pretty  large  area  given  to 


486  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Pi.Vl 

a  single  crop.  Such  farm  machinery  can  not  be  used  as  well 
east  of  the  Alleghany  Mountains  as  in  the  Mississippi  Valley, 
and  it  is  still  uneconomical  in  large  portions  of  the  civilized 
world.  The  use  of  traction  engines  for  plowing  is  increasing 
slowly.  Other  machines  that  can  be  used  at  the  barn,  and 
can  be  moved  from  one  farm  to  another,  have  a  constantly 
widening  use,  as  threshers,  automatic  unloading-forks,  corn- 
shellers,  feed-cutters,  hay-balers,  steam  and  gasoline  engines 
for  pumping,  wood-sawing,  etc.  With  the  aid  of  these  ma- 
chines the  labor  required  to  produce  the  staple  food  for  one 
hundred  people  is  a  fraction  of  what  it  was  a  hundred  years 
ago. 

The  use  of  machinery  in  land  and  water  transportation 
(steamships,  locomotives,  electric  power),  has  affected  all 
other  kinds  of  industries,  by  changing  their  locations,  increas- 
ing the  supplies  of  materials,  and  widening  the  markets.  Yet 
the  most  typical  applications  of  machinery  have  been  in  manu- 
facturing, in  making  form-changes,  in  the  mass-production 
of  standardized  products.  (See  Chapter  31  on  large  produc- 
tion.) The  most  striking  changes  took  place  in  the  textile 
industries.  In  1840  a  man's  work  in  spinning  cotton  was 
320  times  as  effective  as  in  1769,  in  1855  it  was  700  times. 
Similar  examples  are  found  in  the  manufacture  of  shoes,  and 
in  all  varieties  of  wood-  and  iron-work. 

§  3.  The  lump  of  labor  notion.  Of  the  countless  inven- 
tions many  do  not  "save  labor,"  but  merely  add  to  the  com-, 
fort  of  the  user,  or  to  the  ease  of  the  worker;  others  enable 
men  to  do  new  things  before  quite  beyond  the  power  of  any 
man  or  group  of  men;  but  many  are  "labor  saving,"  in  the 
sense  that  they  enable  the  same  labor  to  get  a  larger  result 
in  the  same  time,  or  the  same  result  in  less  time. 

The  popular  judgment  always  has  been  that  this  reduces 
the  "amount  of  work"  to  be  done,  meaning  the  opportunities 
for  employment,  the  number  of  jobs  to  be  had  by  workers. 
The  "lump  of  labor"  notion,  as  it  is  called,  is  widely  held, 
especially  among  workingmen.     The  notion  is  that  there  is 


Ch.  36]  MACHINERY  AND  WAGES  459 

exactly  so  much  labor  predetermined  to  be  done;  therefore, 
if  machines  are  introduced,  there  is  that  much  less  for  men 
to  do.  The  conclusion  easily  drawn  is  that  labor-saving  ma- 
chines are  the  explanation  of  any  existing  unemployment ;  and 
that  they  make  wages  low.  Yet  few  if  any  would  be  rash 
enough  to  say  that  the  income  of  the  masses  would  be  higher 
to-day  if  all  tools  and  machines  were  abandoned  and  men 
worked  barehanded.  It  is  recognized  that  such  a  course  would 
reduce  all  alike  to  want ;  indeed,  that  without  the  aid  of  labor- 
saving  appliances  the  present  population  would  be  utterly 
unable  to  support  existence.  The  objection  is  rather  vaguely 
felt  to  the  use  of  too  much  machinery,  and  to  that  kind  which 
has  been  recently  introduced,  and  to  that  kind  which  is  used 
in  the  objector's  own  trade.  The  experience  in  the  rapid 
introduction  of  machines  in  England  in  the  period  called 
**the  industrial  revolution"  (about  1775  to  1825),  as  well  as 
the  experience  of  workers  when  a  rapid  change  is  made  in 
their  own  trades,  gives  an  appearance  of  truth  to  this  view, 
§4.  Evils  of  "the  industrial  revolution."  It  chanced 
that  the  extensive  introduction  of  machinery  in  England, 
particularly  in  textile-manufacture,  was  coincident  with  the 
unhappy  result  of  a  lengthening  of  the  hours  of  labor  in  fac- 
tories and  a  lowering  of  wages.  These  were,  in  fact,  quite 
abnormal  consequences  and  have  not  been  seen  elsewhere, 
altho  the  owners  of  factories  wish  to  keep  their  machines  em- 
ployed as  many  hours  as  possible.  The  laboring  classes  of 
England  were  at  that  time  demoralized  and  depressed  by  in- 
dustrial and  social  influences  that  had  no  logical  connection 
with  machinery:  the  very  rapid  growth  of  population,  due 
in  part  to  the  evil  workings  of  the  system  of  poor  relief,  ex- 
cessive taxation  to  carry  on  wars,  the  abnormally  rapid 
growth  of  cities.  In  all  other  countries  of  Europe  and  in 
America,  where  the  introduction  of  machinery  has  been  more 
gradual,  it  has  been  followed  by  a  shortening  of  working 
hours  (as  eventually  it  was  in  England  also)  and  by  a  rise 
of  wages.     Indeed,  the  experience  of  England  served  as  a 


460  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Pt.VI 

warning  to  other  nations,  and  by  labor  organization  and  fac- 
tory-regulation much  was  done  to  reduce  the  shock  of  rapid 
introduction  of  machines. 

§  5.  Some  evils  of  the  introduction  of  machinery.  Not 
infrequently  it  has  happened  that  employers  have  introduced 
labor-saving  machines  at  the  time  of  a  strike,  so  that  they 
could  turn  out  the  former  amount  of  product  with  fewer  men. 
The  strike  gave  just  the  motive  needed  to  overcome  the  in- 
ertia of  changing  to  a  more  expensive  process,  one  perhaps 
still  of  somewhat  uncertain  advantage.  Small  wonder  that 
the  striking  workmen  should  view  the  machine  as  a  strike 
breaker,  for  literally  at  the  moment  it  was  taking  "their 
job"  away  from  them. 

In  more  normal  conditions,  when  there  is  no  strike,  it  often 
may  happen  that  the  immediate  effect  of  improved  machin- 
ery, if  suddenly  introduced,  is  to  throw  some  men  out  of 
employment.  Any  sudden  change  in  industry  injures  men 
that  have  become  adapted  to  the  work  that  is  affected.  This 
is  as  true  of  change  brought  about  by  the  opening  of  new 
trade  routes  or  by  scientific  discoveries  (where  machinery 
does  not  enter  in)  as  in  the  case  of  labor-saving  machines. 
If  machines  displace  labor  rapidly,  men  that  can  not  adjust 
themselves  to  the  new  conditions  suffer,  and  there  are  always 
some  that  can  not  adjust  themselves,  always  some  that  suffer. 
A  well-mastered  trade,  a  wage-earning  tho  intangible  pos- 
session, may  be  made  suddenly  valueless.  Men  can  not 
quickly  change  their  methods  of  working  or  their  place  of 
work.  It  is  rarely  possible  for  a  man  past  middle  life  to 
shift  over  into  a  new  trade  where  his  efficiency  will  be  as 
great  and  his  pay  as  high  as  in  the  old.^  New  methods  of 
puddling  iron  sent  many  old  men  into  the  poorhouses  of 
Pennsylvania  between  1890  and  1900.  Even  where  the  total 
employment  increases,  the  individual  sometimes  suffers,  Tlie 
increased  demand  resulting  from  the  cheapening  of  a  product 

1  See  chs.  18  and  19 


Ch.  36]  MACHINERY  AND  WAGES 


461 


may  call  for  more  workers  than  were  employed  before  the 
new  machinery  came  in,  but  men  needing  a  different  training, 
and  some  of  the  former  workmen  may  be  thrown  out  of  em- 
ployment. The  introduction  of  the  linotype  and  monotype 
is  said  to  have  displaced  a  large  number  of  hand  type-setters, 
but  to  have  increased  the  amount  of  printing.  As  the  ma- 
chines are  expensive  and  can  not  be  worked  properly  by  men 
not  highly  expert,  men  past  thirty-five  years  of  age  have  not 
been  allowed  to  learn  their  use.^ 

§  6.  Loss  to  the  less  efficient  workers.  The  least  efficient 
men  in  any  trade  suffer  most  from  the  introduction  of  ma- 
chinery. The  new  method  crowds  hardest  the  man  at  the 
margin  of  employment.  The  more  skilled  workman  can,  at 
his  more  rapid  pace,  still  earn  a  living  wage  in  competition 
with  a  machine,  or  can  move  into  some  other  occupation.  It 
often  happens  that  they  are  advanced  to  be  foremen  or  man- 
agers, and  gain  greatly  by  the  change.  The  less  skilled,  un- 
able to  adapt  themselves,  can  but  drop  out  entirely,  innocent 
victims  of  an  economic  change,  sacrifices  to  the  cause  of  in- 

2  These  sudden  changes  in  machinery  also  cause  losses  in  many 
cases  to  the  owners  of  the  existing  equipment.  Every  considerable 
improvement  brings  unfortunate  results  to  some  while  it  means  gains 
to  others.  At  every  moment  in  a  progressive  society,  some  agents 
are  being  thrown  out  of  use  by  improvements  in  tools  and  machinery. 
The  machinery  in  flour-mills  has  been  almost  completely  changed,  parts 
of  it  repeatedly,  while  steam  rollers  have  been  substituted  for  the  old 
millstones  and  many  old  mills  have  been  abandoned.  A  change  in 
the  process  of  making  paper  threw  out  of  use  much  machinery  that 
was  only  in  part  saved  by  its  removal  and  adaptation  to  the  making 
of  coarser  grades  of  paper.  Many  minor  inventions  in  the  iron  industry, 
still  more  the  invention  of  the  Bessemer  process,  threw  out  of  use 
great  numbers  of  the  old  appliances.  Such  illustrations  can  be  in- 
definitely multiplied. 

Similarly  changes  in  the  sources  of  power  are  shifting  the  location 
of  many  industries  and  causing  the  rise  of  some  and  the  fall  of  other 
valuable  agents.  Water-power,  because  of  its  uncertainty,  has  been 
replaced  in  mauy  places  by  steam-power,  and  in  many  places  steam-power 
in  turn  has  been  rivaled  by  water-power  since  the  improvements  in  the 
generation  and  transmission  of  electricity. 


462  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Pt.VI 

dustrial  progress.  Happily  such  pathetic  incidents  are  rela- 
tively not  numerous.  Most  machinery  is  introduced  in  com- 
mercial center^  when  demand  for  the  products  is  increasing, 
and  there  is  no  need  to  discharge  men;  it  gradually  spreads 
to  other  factories  in  such  a  way  that  most  men  can  adapt 
themselves  to  the  change. 

Since  recorded  history  began  there  have  been  recurring 
periods  of  unemployment.  Greece  and  Rome  often  had  the 
problem.  But  it  is  helpful  in  getting  some  perspective  in 
judging  the  effects  of  machinery,  to  note  that  in  proportion  to 
the  number  of  the  population  the  unemployed  were  probably 
more  numerous  in  the  reign  of  Queen  Elizabeth  than  they  are 
to-day,  and  the  general  level  of  income  was  much  lower. 

§  7.  Effect  of  machinery  in  different  industries.  Every 
new  machine  or  process  compels  some  readjustment  of  em- 
ployment, the  number  in  some  industries  increasing,  in  others 
diminishing.  If  extreme  examples  are  taken,  it  may  be  made 
to  appear  either  that  an  increase  or  that  a  decrease  of  .em- 
ployment results  from  machinery.  Labor-saving  machines 
may  be  roughly  divided  into  three  classes:  those  that  create 
more  employment  in  the  particular  industry  than  they  take 
away;  those  that  leave  employment  unchanged;  those  that 
reduce  the  amount  of  employment.  To  allow  for  changes  in 
population  these  classes  may  be  expressed  as  percentages  of 
the  whole  population,  (1)  those  labor-saving  machines  that 
call  for  a  larger  percentage  of  workers  than  before  in  the 
particular  industry,  (2)  the  same  percentage,  (3)  a  smaller 
percentage.  The  superficial  appearance  of  "saving  of  labor" 
is  greater  than  the  reality  in  every  industry  where  the  new 
machines  are  more  elaborate  and  costly  than  the  former  tools 
or  machines.  Labor  is  required  to  get  out  the  material  for 
the  new  machines,  to  make,  repair  and  maintain  them,  and 
to  supply  them  with  power.  But  of  course  they  would  not 
be  "labor-saving"  if  the  labor  thus  required  in  new  ways 
were  equal  to  that  released  by  the  new  process. 

The  chief  changes  of  employment  result  from  the  shift  of 


Ch.36]  machinery  AND  WAGES 


463 


demand  for  products.  The  demand  for  different  products  is 
more  or  less  elastic.  Industries  grade  off  from  those  that  are 
capable  of  developing  a  great  demand  for  labor  to  those  at 
the  other  extreme  that  are  capable  of  a  very  slight  increase, 
as  a  result  of  a  lowering  of  the  price.  There  is  hardly  any 
assignable  limit  to  the  consumption  of  textiles,  provided  their 
price  falls;  the  demand  for  dress  alone  is  indefinitely  ex- 
pansible. Queen  Elizabeth,  who  had  a  different  dress  for 
every  day  in  the  year,  has  many  potential  imitators.  It  is  a 
striking  fact,  in  view  of  the  prominent  part  labor-saving 
machines  had  in  the  textile  industries,  that  there  were  more 
handlooms  in  use  in  England  in  1850  than  fifty  years  before, 
tho  in  the  meantime  power-looms  had  displaced  the  handlooms 
in  all  the  great  factories.  There  was  still  room  for  variety 
of  patterns  and  processes.  There  is  a  constant  increase  rela- 
tively, as  well  as  absolutely,  in  the  number  employed  in  trans- 
portation, as  each  census  shows;  there  are  more  railroad  em- 
ployees relative  to  the  population  than  there  were  stage-driv- 
ers and  teamsters  before  the  day  of  railroads.  The  proportion 
of  people  now  engaged  in  printing  books  and  papers  is  larger 
by  far  than  in  the  days  when  all  the  books  of  the  world  were 
written  by  the  old  monks  in  their  cloisters.  The  proportion 
of  workers  in  agriculture,  on  the  other  hand,  is  less  than  it 
formerly  was.  In  part  this  is  a  change  in  appearance  only, 
for  the  farmer  once  made  a  large  part  of  his  tools  which  are 
now  made  by  workers  employed  in  manufactures,  yet  who  in 
a  very  real  way  are  aiding  in  agriculture.  In  part  the  change 
is,  however,  the  effect  of  the  use  of  machinery  and  other  im- 
provements in  agricultural  processes.  The  amount  of  raw- 
food  products  required  for  each  hundred  persons  is  quite  in- 
elastic. As  it  becomes  possible  to  expend  more  for  food,  the 
change  is  made  in  quality  and  in  variety  rather  than  in  quan- 
tity. The  greater  part  of  the  saving  in  the  cost  of  food  is, 
however,  expended  in  other  products,  and  the  labor  saved  in 
agriculture  finds  employment  in  supplying  new  desires.  In 
other  cases,  also,  new  industries  are  made  possible  as  machines 


464  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Pr.  VI 

liberate  energy  from  the  production  of  the  more  necessary- 
goods.  At  each  census  it  is  necessary  to  change  the  schedule 
of  occupations,  because  men  have  adopted  callings  unknown 
before.  The  desires  of  men  are  variable  and  indefinitely  ex- 
pansible, and  as  the  products  of  machines  increase  and  the 
prices  fall,  income  is  expended  in  other  directions.  Between 
1890  and  1910  the  proportion  of  the  population  engaged  in 
art,  music,  travel,  social  festivities,  etc.,  in  America  has  in- 
creased as  is  indicated  in  the  following : 

Population    46  per  cent 

Printers  and  lithographers.  68  per  cent  (While  the  linotype,  revolving 

presses,  etc.,  were  increas- 
ing.) 

Teachers 80  per  cent 

Journalists,  scientists 124  per  cent 

Actors 150  per  cent  ( While  the  "movies"  in- 
creased more  rapidly.) 

Employees   of   railroads 158  per  cent  (While    great     improvements 

were  made  in  locomotives, 
etc.) 

§  8.  Beneficial  effect  of  machinery  upon  wages.  Now  let 
us  look  at  the  fundamental  theory  in  the  problem.  The  intro- 
duction of  machinery  has  taken  place  along  with  changes  in 
other  dynamic  forces,  some  of  them  doubtless  in  themselves 
"tending"  to  raise,  others  to  lower,  the  level  of  real  wages. 
Our  question  may  take  this  form:  What  is  the  effect,  given 
a  stationary  population,  on  a  fixed  area,  with  other  resources 
unchanged  ?  To  an  unchanging  population  come  better,  more 
efficient  machines.  It  is  as  if  the  land  became  richer,  the 
materials  easier  to  get,  the  workers  stronger  and  swifter.  It 
is  a  richer  economic  environment.  The  owners  of  machines, 
competing  for  the  sale  of  machine  uses,  have  more  to  offer 
to  each  laborer.  It  is  the  converse  of  the  decreasing  returns 
when  population  grows  and  decreasing  returns  result;  here 
the  material  equipment  grows  and  increasing  returns  result. 
The  application  of  labor  stops  at  the  higher  uses  or  services 
of  agents  and  is  not  forced  to  the  lower.  The  more  perfect 
the  economic  environment,  the  higher  the  incomes  even  of 


Ch.36]  machinery  AND  WAGES 


4G5 


those  who  own  no  part  of  the  machinery.  A  part  of  this 
benefit  may  appear  in  the  form  of  higher  money  wages  re- 
ceived, a  part  in  the  form  of  the  lower  prices  of  things  bought. 
Real  wages  are  the  essential  thing.  As  a  consumer  the  laborer 
shares  with  every  other  member  of  society  in  the  benefits 
of  improved  machinery.  The  benefits  resulting  from  great 
abundance  are  diffused,  and  as  goods  are  brought  from  the 
high,  or  scarcity,  end  of  the  scale  of  value  down  toward  the 
level  of  free  goods,  everybody  in  the  long  run  gains  by  the 
abundance  and  cheapness. 

§  9.  Dependence  on  abstinence.  The  gain  to  the  general 
welfare,  however,  can  result  only  when  the  new  inventions  are 
actually  embodied  in  machines.  An  invention  is  only  an  im- 
material idea,  and  the  machines  in  which  inventions  are  in- 
corporated are  wealth  which  has  a  capital  value.  Further,  a 
gain  can  result  only  when  the  usance  of  the  machines  is  not 
so  high  as  to  absorb  the  larger  part  of  the  gain  in  efficiency. 
Not  all  labor-saving  inventions  call  for  more  elaborate  or  more 
costly  machines.  Some  are  merely  better  methods,  and  re- 
quire no  more  equipment — or  even  less.  Some  of  them  are 
simpler  and  less  costly  than  the  forms  they  displace.  These 
(unless  patented)  are  free  goods,  uplifting  the  efficiency  of 
production  "without  money  and  without  price."  But  some 
inventions  call  for  a  larger  and  longer  investment.  Unless 
the  rate  of  time-preference  is  low  enough  the  new  invention 
will  not  be  embodied  in  machines  that  will  displace  the  old, 
less-efficient  forms.  (See  Chapter  21.)  Labor-saving  inven- 
tions thus  simply  enlarge  the  range  of  choice  of  means  of 
production  among  which  enterprisers  and  investors  may 
choose,  within  the  limits  of  their  rates  of  time-preference. 
The  gain  in  product  by  the  new  method  as  compared  with 
the  old  may  be  so  small  that  it  only  suffices  to  recompense 
the  abstinence  required  for  the  larger  investment.  (The  new 
method  will  not  be  used  if  it  produces  less  than  the  old  for 
a  given  outlay.)  Thus  as  machines  call  for  larger  and  longer 
investments,  unless  the  gain  in  productive  efficiency  is  large, 


468  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Px.  VI 

a  larger  proportion  of  the  total  product  must  go  to  capital, 
while  larger  absolute  amounts  go  both  to  labor  and  to  capital. 
(But  see  below,  on  opposing  tendencies.) 

§  10.  Grades  of  labor,  and  gains  from  machinery.  The 
general,  or  average,  gain  is  not  to  be  judged  by  comparing 
the  conditions  of  the  lowest  grade  of  labor  with  those  of  fifty 
years  ago,  for  while  that  grade  may  have  been  bettered  only 
a  little,  it  has  been  possible  for  large  numbers  to  rise  to  higher 
grades  because  of  the  use  of  machinery.  The  physical  tasks 
are  to-day  much  lighter  than  ever  before,  and  a  larger  pro- 
portion of  society  is  engaged  in  industries  that  require  skill 
and  thought  rather  than  physical  labor.  That  portion  of  the 
work  is  being  more  and  more  shifted  upon  machines.  A  ma- 
chine is  "an  iron  man,"  it  has  been  said,  and  comes  into  com- 
petition with  other  men  to  lower  their  wages  by  outworking 
and  underbidding  them.  But  this  iron  man  can  do  only  auto- 
matic tasks;  it  is  not  capable  of  exercising  judgment.  Every 
intelligent  laborer  who  can  adjust,  adapt,  fit  himself  for  more 
intelligent  action,  will  rise  above  the  machine  and  profit  by 
its  presence.  But  crude  physical  labor  which  can  compete 
only  on  the  plane  of  automatic  machines  must  find  its  field 
of  employment  more  and  more  hedged  in.  If,  however,  even 
a  portion  of  the  workers  (or  of  their  children)  are  able  to 
change  to  new  or  to  rise  to  more  skilled  occupations,  they 
reduce  by  so  much  the  presence  of  competition  below,  and 
make  possible  a  rise  of  wages  there  also.  (See  the  doctrine 
of  non-competing  classes.) 

§  11.  Opposing  tendencies.  It  appears  from  this  survey, 
that  the  logical  effect  of  labor-saving  machinery  is  to  lift  the 
level  of  efficiency  and  productiveness  on  which  labor  operates, 
A  richer  world  relative  to  population  means  a  higher  income 
to  the  average  man.  The  benefits  are  unequally  distributed, 
but  nearly  all  share  to  some  degree. 

But  it  must  not  be  overlooked  that  certain  conditions  are 
assumed  and  if  they  are  curtailed  or  absent  the  general  bene- 
fits which  machinery  in  itself  tends  to  create  may  be  reduced 


Ch.  3G]  machinery  AND  WAGES  467 

and  be  more  unequally  distributed.    These  conditions  are: 

(a)  Competition  among  the  owners  of  machines.  So  far 
as  machines  favor  large  industry,  and  large  industry  widens 
the  scope  of  monopoly  power  (Chapter  31),  prices  may  be 
raised  to  the  benefit  of  the  monopolist  so  as  to  cancel  a  large 
part  of  the  general  gain. 

(b)  A  population  increasing  but  slowly,  so  as  not  to  neu- 
tralize the  gain  from  machinery.  An  increase  in  population 
driving  the  cultivation  of  the  soil  to  lower  levels,  may  in- 
crease food  prices  enough  to  offset  the  gain  from  lower  prices 
in  manufacturing  and  transportation. 

(c)  Natural  resources  not  decreasing  through  consumptive 
use.  The  waste,  destruction,  and  inevitable  using  up  of  basic 
material  resources  is  a  change  which,  like  the  preceding, 
■operates  to  offset  the  gain  from  improving  machinery. 


CHAPTER  37 
WASTE  AND  LUXURY 

§  1.  Accidental  destruction  of  wealth.  §  2.  Intentional  destruction  of 
wealth  by  the  owner.  §  3.  Intentional  destruction  of  others'  wealth. 
§  4,  Careless  waste.  §  5.  Waste  in  public  outlay.  §  6.  The  fallacy  of 
waste.  §  7.  Definitions  of  luxury.  §  8.  Luxury  to  give  employment. 
§  9.  The  fallacy  of  luxury.  §  10.  Sudden  changes  in  standards  of  lux- 
ury. §  11.  Happiness  and  the  simple  life.  §  12.  The  question  of  justice. 
§  13.  Animal  choice.  §  14.  Choice  by  primitive  men.  §  15.  Desires  and 
progress.  §  16.  Function  of  moderate  discontent.  §  17.  Luxury  as  an 
incentive  to  progress. 

§  1.  Accidental  destruction  of  wealth.  Before  approach- 
ing in  the  next  chapter  the  subject  of  the  dynamic  influence 
of  saving  and  the  accumulation  of  wealth,  let  us  look  at  the 
subject  in  its  negative  aspects,  namely,  waste  and  luxury. 
By  waste  is  meant  the  accidental  or  intentional  using  and 
using  up  of  more  wealth  (and  services)  than  would  suffice 
for  the  purpose  of  the  use.  In  waste  the  potential  uses  in 
goods  are  applied  so  that  they  cause  less  desirable  results  to 
the  user  than  they  might,  or  even  give  no  use  at  all.  We  are 
concerned  here  with  the  dynamic  and  social  aspect  of  the  case. 
The  question  is:  What  is  the  dynamic  effect  of  waste  as  a 
policy?  In  which  way  will  it  carry  the  general  level  of  in- 
comes, upward  or  downward?  There  is  a  popular  opinion, 
long  held,  that  waste  in  itself  is  a  good  thing,  that  it  gives 
employment  and  benefits  the  working  man. 

In  a  simple  society,  without  exchange,  the  result  of  waste  is 
evidently  bad  for  the  self-sufficing  families.  If  they  destroy 
their  food,  they  suffer  from  hunger  or  gratify  appetite  less 
perfectly;  if  they  destroy  their  clothing,  they  are  cold;  if 
they  destroy  their  house,  they  have  no  shelter.    Waste  makes 

468 


Ch.  37]  WASTE  AND  LUXURY  469 

their  economic  environment  less  fitted  for  their  use.  In  the 
conditions  of  our  society,  where  goods  are  exchanged,  the  re- 
sult appears  to  be  different.  The  need  to  replace  the  lost 
goods  makes  a  demand  for  special  kinds  of  labor  or  goods,  and 
this  appears  "to  create"  employment  for  labor.  But  if  a 
part  of  the  income  of  the  loser  must  be  diverted  from  other 
uses  to  replace  the  wealth  destroyed,  those  from  whom  he 
would  have  bought  suffer  an  unexpected  falling  off  of  their 
sales.  The  thought  of  an  immediate  benefit  to  one  obscures 
the  corresponding  loss  to  another.  The  net  result  is  a  loss 
of  wealth  and  gratification  to  the  community  as  a  whole. 

There  is  a  real  exception  where  the  accidental  destruction 
removes  some  social  difficulty.  Such  great  fires  as  those  in 
London  in  1665  and  in  Chicago  in  1872  result  in  wonderful 
improvement  to  the  city  as  a  whole  and  eventually  even  to 
most  of  the  individual  owners.  When  an  old  city  is  built 
almost  entirely  of  wood,  each  owner  may  think  it  to  his  inter- 
est to  keep  the  old  buildings.  A  great  fire  sweeps  them  all 
away  and  compels  the  rebuilding  of  the  city  on  a  new  and 
higher  standard.  But  the  usual  resultant  of  accidental  de- 
struction is  loss  to  the  owner,  rarely  with  benefit  on  the  whole 
to  others.  It  is  a  use  of  wealth  without  a  fulfilling  of  the 
purpose  of  production,  the  gratifying  of  desires. 

§  2.  Intentional  destruction  of  wealth  by  the  owner. 
Another  type  of  case  is  the  intentional  destruction  of  wealth 
by  the  owner,  to  make  trade  good.  The  case  in  mind  is  not 
where  the  destruction  is  inevitable  without  man's  action,  and 
he  merely  tries  to  minimize  it— such  a  case  as  the  throwing 
overboard  of  a  part  of  the  cargo  when  the  ship  is  in  danger 
of  sinking,  in  the  hope  thereby  of  saving  the  rest,  or  as  the 
blowing  up  of  buildings  to  prevent  the  spread  of  a  fire.  The 
case  in  mind  is  the  deliberate  destruction  of  wealth  that  might 
be  kept  for  use.  One  labor  leader,  for  example,  boasted  that 
when  he  drank  pop  he  always  broke  the  bottle  "to  make  trade 
good"  by  helping  the  glass  industry.  The  refuting  of  this 
fallacy  is  one  of  the  time-honored  tasks  in  political  economy. 


470  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Pt.  VI 

There  is,  it  is  true,  an  increase  in  the  demand  for  glass  and 
glassblowers '  labor;  but  at  the  same  time  there  is  a  decrease 
in  the  demand  for  other  goods  and  other  kinds  of  labor.  The 
proverb,  old  in  Shakespeare's  time,  runs,  "Nothing  can  come 
of  nothing."  What  is  spent  for  one  purpose  can  not  be  for 
another;  ''you.  can  not  eat  your  cake  and  have  it,  too."  A 
given  income  can  be  spent  in  one  of  many  ways,  but  not  in 
all  ways  or  even  in  two  ways  at  once.  It  is  a  question  of 
this  or  that,  not  this  and  that.  At  the  same  moment  that 
the  demand  for  pop-bottles  is  increased,  the  demand  for  other 
things  is  decreased.  Such  a  form  of  benevolence  is  a  futile 
attempt  to  provide  labor  for  one  man  by  taking  it  from  an- 
other. Moreover,  it  is  an  uneconomic,  harmful  attempt,  for 
the  breaking  of  one  bottle  to  have  it  replaced  by  another  adds 
nothing  to  the  sum  of  enjoyable  goods  in  the  world;  but  the 
same  labor  and  other  agents  could  and  should  be  used  to  make 
some  of  the  many  other  needed  things. 

If  the  advocate  of  wealth-destruction  would  be  consistent, 
he  should  break,  not  merely  the  pop-bottle,  but  the  water- 
pitcher  and  the  table  as  well;  he  should  make  a  bonfire  at 
least  once  daily  of  his  clothing,  his  house,  and  its  furnishings ; 
he  should  advise  blowing  up  the  steamboat  and  ripping  up 
the  railroad  when  they  have  carried  a  single  load  of  passen- 
gers. Thus,  when  all  men  were  naked  and  starving,  and  civ- 
ilization had  sunk  to  savagery,  trade  would  have  been  made 
as  "good"  as,  by  the  policy  of  destruction,  he  could  ever 
hope  to  make  it. 

§  3.  Intentional  destruction  of  others'  wealth.  Another 
type  of  case  is  the  intentional  destruction  of  wealth  owned 
by  other  persons  to  benefit  trade  in  general.  The  acts  referred 
to  are  not  done  with  criminal  motives,  but  with  a  view  to  the 
public  interest.  If  one  sets  fire  to  the  property  of  another, 
seeking  revenge  or  plunder,  he  is  guilty  of  the  crime  of  arson. 
But  what  shall  be  said  of  volunteer  firemen  that  let  an  old 
house  burn  down  to  provide  labor  for  carpenters  and  "to  make 
business  good"?     The  duty  of  firemen  is  to  put  out  fires,  no 


Ch.  37]  WASTE  AND  LUXURY  471 

matter  what  the  building  is ;  but  they  choose  sometimes  to  be 
ministers  to  the  social  interest  as  they  interpret  it.  The  more 
spent  for  carpenters'  work  out  of  any  income,  the  less  can  be 
spent  for  other  objects.  It  is  true,  however,  that  if  in  a  small 
town  the  money  to  rebuild  is  borrowed  from  a  distant  loan  or 
insurance  company,  there  is  an  increase  in  employment  in  that 
town  for  one  season;  and  that  is  as  far  as  most  men  try  to 
carry  their  economic  analysis. 

Servants  sometimes  excuse  the  breaking  of  dishes  and  furni- 
ture on  the  ground  that  it  makes  work,  and  that  the  employer 
can  afford  it.  But  income  is  thus  diverted  from  other  expendi- 
ture, either  for  productive  use  or  for  direct  use.  In  the  light 
of  the  theory  of  wages,  it  would  appear  that  carelessness  re- 
duces the  servant's  own  efficiency,  and  in  the  long  run  the 
loss,  in  part  at  least,  comes  from  the  wages  of  that  particular 
servant.  Bastiat's  discussion  of  the  broken  window-pane  is 
often  and  deservedly  quoted.  He  contrasted  what  was  seen 
with  what  was  unseen.  What  is  seen  is  a  certain  immediate 
benefit  that  the  glass-maker  and  glazier  get;  what  is  not  seen 
is  that  the  power  to  expend  an  equal  amount  for  other  thmgs 
ia  thereby  lost  by  the  owner  of  the  house. 

§  4  Careless  waste.  The  destruction  of  goods  of  unneces- 
sarily large  value  to  secure  a  given  result  is  likewise  justified 
as  -making  trade  good."  The  blunder  that  compels  the  re- 
building of  a  wall  in  a  rich  man's  garden  is  an  occasion  for 
congratulation  to  those  who  see  in  it  a  happy  provision  of  work 
for  the  unemployed.  It  is  easy  to  forget  that  the  proper  use 
of  goods  is  the  final  step  in  production.  According  as  goods 
are  well  or  poorly  used,  the  production-that  is,  the  real  in- 
come or  gratification  they  afford-is  large  or  simll.  D^er- 
ences  in  skill  in  the  use  of  wealth  are  great.  A  French  cok 
we  are  often  told,  can  make  a  palatable  soup  f^om  what^^s 
from  the  average  American  kitchen  into  the  swill-pail.  Waste 
^tL  use  0  goods  is  more  likely  to  be  found  in  new  countnes 
where  wealth' comes  more  easily  and  necessity  does  not  en- 
force frugality  upon  the  masses  of  the  people. 


472  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY      [Pt.VI 

The  praise  of  careless  waste  implies  the  error  noted  in  the 
preceding  propositions.  Waste  makes  work  for  a  certain  class, 
but  not  more  work  (employment  and  wages)  for  labor  as  a 
whole.  It  appears  to  be  good  only  when  the  interests  of  a 
small  class  of  workers  or  of  tradesmen  are  looked  at  for  the 
moment;  it  is  bad  in  the  long  run  alike  for  workingmen  and 
for  all  other  classes  of  society.  Far  more  of  wisdom  lies  in 
the  proverb,  *'A  penny  saved  is  worth  two  earned."  The 
economic  use  of  wealth  as  surely  adds  to  wealth  (and,  ulti- 
mately, to  the  income  of  society)  as  any  other  mode  of  pro- 
duction. 

§  5.  Waste  in  public  outlay.  Some  government  expendi- 
tures, as  for  local  post-office  buildings,  and  river  and  harbor 
improvements,  are  sometimes  favored,  not  because  their  im- 
mediate purposes  are  good,  but  because  they  "make  work"  and 
"distribute  money"  throughout  the  country.  This  apology 
for  public  extravagance  in  all  its  forms  has  an  incredible  hold 
on  the  public  mind.  It  seems  even  easier  to  rejoice  that  the 
big  impersonal  thing,  the  government,  fails  to  get  its  money's 
worth  than  that  one's  neighbor  fails  to  do  so.  The  money  for 
public  expenditure  comes  from  taxation,  and  no  matter  what 
the  system  of  taxation,  the  burden  falls  upon  some  one,  reduc- 
ing the  incomes  at  the  disposal  of  the  people  to  expend  for  ob- 
jects of  their  own  choice.  If  the  work  is  not  worth  doing  for 
itself,  the  collection  of  money  in  small  amounts  from  many 
tax-payers  and  its  expenditure  as  a  large  sum  in  one  locality 
results  in  a  net  loss  to  society  as  a  whole.  Where  the  result 
is  worth  something,  but  not  enough  by  itself  to  justify  the  ex- 
penditure, the  fallacy  of  the  destruction  of  wealth  is  present 
in  a  smaller  degree.  Examples  are  seen  in  useless  offices,  over- 
paid officials,  the  extreme  use  of  pensions,  and  in  some  public 
subsidies. 

§  6.  The  fallacy  of  waste.  Let  us  restate  the  ideas  that 
have  been  touched  upon.  The  fallacy  of  waste  is  due  to  a 
narrow  and  incomplete  view  of  the  effects  resulting  from  a 
particular  use  of  wealth.    In  many  cases  it  is  possible  that 


Ch.  37]  WASTE  AND  LUXURY  473 

some  one  person  may  benefit  by  another's  mishap  or  folly  in 
the  use  of  wealth.  The  complex  interrelations  of  men  in 
society  make  this  inevitable.  But,  to  appreciate  the  dynamic 
effects  of  such  action  upon  society  in  general,  one  needs  but 
to  go  back  to  the  essential  thought  of  wealth  and  its  pur- 
poses. As  the  average  efficiency  and  bounty  of  the  world  fall, 
so  fall  the  income  and  welfare  of  men.  As  it  rises,  the  social 
and  economic  levels  rise  also.  Economic  wealth  has  poten- 
tially two  kinds  of  uses,  direct  or  indirect:  to  gratify  desire 
— thus  fulfilling  its  destiny — or  to  be  converted  into  higher 
and  more  efficient  agents.  That  the  possibilities  of  the  latter 
are  boundless  is  overlooked  in  the  fallacies  here  criticized.  A 
bountiful  and  efficient  world  would  be  the  result  of  abstinence 
and  saving;  a  barren  and  used-up  world,  the  result  of  the 
fallacy  of  waste. 

§  7.  Definitions  of  luxury.  Closely  related  to  the  problem 
of  waste,  but  still  more  difficult,  is  the  problem  of  luxury.  It 
is  not  possible  to  define  luxury  absolutely;  it  is  a  relative 
term.  The  conception  of  luxury,  however  defined,  involves 
always  the  thought  of  great  consumption  of  wealth  for  unes- 
sential pleasures.  Those  opposed  to  i  •.  condemn  it  in  their 
definition  of  it,  as,  for  example:  "an  excessive  consumption  of 
wealth,"  or  "devoting  a  relatively  large  amount  of  wealth  to 
the  satisfaction  of  a  relatively  superfluous  want."  Those  who 
take  a  more  moderate  and  favorable  view  say:  "It  is  the 
enjoyment  of  forms  of  wealth  not  obtainable  by  the  mass  of 
men."  Luxury  is  not  entirely  a  matter  of  riches.  Many  a 
person  of  moderate  income  has  relatively  superfluous  and  ex- 
pensive tastes.  One  spends  more  for  music  than  many  a  mil- 
lionaire does;  another  more  for  books.  The  difficulty  in  the 
definition  as  well  as  in  the  problem  of  luxury  is  that  it  in- 
volves a  mixture  of  economic  and  of  ethical  questions. 

§  8.  Luxury  to  give  employment.  Luxury,  like  waste,  is 
justified  by  some  as  giving  employment  to  labor.  Typical  in- 
stances are  extravagant  dress  and  elaborate  balls  where  fine 
and  costly  flowers,  decorations,  music,  and  coaches  require 


474  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Px.VI 

the  expenditure  of  a  large  amount  of  money.  It  is  said  of  the 
Empress  Eugenie,  wife  of  Napoleon  III,  that,  in  order  to  help 
the  glove  industry  of  France,  she  wore  a  pair  of  gloves  but 
once ;  in  order  to  help  other  French  industries,  she  purchased 
many  silks  and  laces.  It  is  a  very  comfortable  doctrine  to 
some  people  that  the  oftener  they  change  their  dress,  the 
greater  benefactors  to  society  they  are.  From  time  to  time  a 
great  society  "ball"  is  given  in  the  metropolis,  possibly  little 
more  elaborate  and  expensive  than  many  another  ball;  but 
if  it  chances  to  be  a  dull  time  for  news  the  papers  all  over  the 
land  give  columns  to  its  discussion.  The  newspapers  at  such 
times  usually  print  many  interviews  with  citizens  of  varied 
occupations,  and  the  thought  appears  over  and  over  that  such 
balls  have  at  least  the  merit  of  giving  employment  to  labor, 
evidently  meaning  employment  additional  to  the  total  amount 
which  otherwise  would  have  been  possible. 

§  9.  The  fallacy  of  luxury.  The  fallacy  of  this  is  essen- 
tially the  same  as  that  in  the  argument  for  waste  and  destruc- 
tion. From  the  fact  that  these  particular  tailors,  musicians, 
and  florists  would  have  less  employment  if  this  ball  were  not 
given,  it  is  falsely  con  -luded  that,  but  for  this  ball,  this  par- 
ticular income,  or  capital,  would  not  be  used  at  all.  The 
average  of  employment  in  those  special  industries  which  min- 
ister to  luxury  is  the  result  of  and  is  determined  by  the 
average  level  of  demand.  There  are  more  caterers  and  florists 
in  a  large  city  than  in  a  crossroads  village.  It  is  true  that  a 
more  than  ordinarily  gay  season  gives  unusual  profits  to  these 
enterprises,  whereas  an  abrupt  and  extreme  falling  off  in  de- 
mand would  cause  them  large  losses  and  leave  many  workers 
lacking  employment  for  that  one  season.  But,  if  this  limited 
demand  became  usual,  capital  and  labor  would  shift  to  the 
other  industries  to  which  expenditure  had  shifted.  Other 
modes  of  expenditure  than  twenty-five  thousand  dollar  balls 
are  possible,  as,  for  example,  twenty-five  thousand  dollar  pub- 
lic libraries.  Mr.  Carnegie  has  preferred  to  take  his  dissipa- 
tion in  that  form.     That  gives  employment  also ;  not  less  does 


Ch.  37]  WASTE  AND  LUXURY 


475 


investment  in  new  houses,  in  new  railroads,  and  in  new  fac- 
tories. More  employment  of  a  particular  kind  of  labor  is 
caused  in  one  case  than  in  another,  but  not  more  employment 
of  labor  as  a  whole  and  on  the  average. 

§  10.  Sudden  changes  in  standards  of  luxury.  Luxury 
may  be  in  various  degrees  and  correspondingly  may  have 
various  effects  upon  the  state  of  wealth  and  income,  and  upon 
their  movements.  It  might  accompany  a  general  condition  of 
conservative  abstinence,  where  only  the  clear  surplus  of  in- 
come is  given  to  luxury,  preserving  a  static  equilibrium.  The 
degree  of  luxury  may,  however,  change  dynamically  toward 
either  extreme.  First,  it  might  increase  so  that  it  exceeded 
each  spender's  clear  income,  encroached  upon  capital,  and 
became  a  policy  of  prodigality.  The  result  of  this  must  be  to 
stimulate  for  a  time  all  the  trades  serving  to  provide  the 
superfluities,  but  eventually  to  leave  them  without  a  market 
for  their  wares.  Thereupon  the  factors  would  have  to  be 
returned  to  the  use  for  necessities.  The  community  as  a 
whole  would  be  impoverished  as  well  as  the  individuals. 

Secondly,  dynamic  change  may  take  the  form  of  the  de- 
crease of  luxury,  expenditure  being  limited  to  necessities,  and 
cumulative  abstinence  being  carried  to  its  maximum.  The 
question  of  the  effect  of  abandoning  luxury  should  this  dy- 
namic change  occur  suddenly,  is  most  difficult.  "What  would 
happen  if  everybody  at  once  began  to  live  on  the  bare  neces- 
sities of  life?  If  this  almost  unthinkable  change  took  place, 
all  the  factories  and  agents  used  for  nonessentials  would  at 
once  lose  much  of  their  value.  A  great  industrial  crisis  would 
follow,  as  industry  would  have  to  adjust  itself  abruptly  to  a 
greatly  altered  standard  of  desires.  What  would  happen,  if 
that  standard  continued,  would  vary  as  human  nature  varied. 
There  might  follow  an  increase  of  population,  as  a  result  of 
earlier  marriages  and  larger  families ;  or  a  great  improvement 
in  machinery  and  other  equipment,  or  an  increase  of  chari- 
table giving,  or  more  probable  than  all  else,  a  progressive 
lightening  of  labor,  a  use  of  the  surplus  resources  and  energy 


476  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Pt.  VI 

in  study,  rest,  and  recreation.  It  is  well-nigh  impossible  to 
suppose  that  with  limited  desires  for  the  objective  goods  of 
the  world  there  would  continue  undiminished  efforts  to  pro- 
duce goods  and  to  save  them.  That  would  be  miserliness 
become  universal.  In  actual  life  changes  of  standard  occur 
gradually.  Economizing  in  material  things  by  simpler  living 
makes  possible  not  only  the  increased  efficiency  of  productive 
agents  but  the  increased  enjoyment  of  immaterial  goods,  a 
union  of  plain  living,  easy  living,  and  high  thinking. 

§  11.  Happiness  and  the  simple  life.  We  are  concerned 
here  with  the  economic  not  with  the  moral  issues  involved  in 
luxury,  but  the  line  between  the  two  is  sometimes  hard  to 
draw.  Particularly  hard  is  it  in  answering  the  question,  Does 
luxury  enhance  the  man's  true  psychic  income?  Does  a 
greater  expenditure  on  oneself  give  a  larger  life  than  a 
moderate  expenditure  would  give  1  Surely,  it  is  partly  a  mat- 
ter of  individual  temperament  and  somewhat  a  matter  of 
degree.  Ostentation  has  its  penalties.  Undue  striving  after 
effect  defeats  its  own  purpose.  Happiness  results  from  a  har- 
monious relation  between  man  and  the  world.  Life  loaded 
with  too  much  luggage  staggers  under  the  burden.  The  mere 
spending  of  a  large  income  in  selfish  indulgence  absorbs  all 
the  energies  and  interests  of  some  men  and  women.  Not  only 
happiness  in  the  narrow  sense,  but  self-realization,  is  to  such 
lives  impossible.  The  tired  faculties  of  the  Sybarite  cease  at 
length  to  respond  to  natural  pleasures.  When  the  senses  are 
robbed  of  their  fineness,  youth  grows  blase,  mature  manhood  is 
ennuied,  life  is  empty-  With  the  growth  of  incomes  grows 
the  strain  to  reach  the  self-imposed  standards  of  frivolity. 
Insanity  and  suicide  are  on  the  increase.  The  stress  of  mod- 
ern life  often  makes  men  yearn  for  the  simpler  joys.  From 
the  days  of  the  Stoics  to  our  own  time,  philosophers  and 
preachers  in  times  of  great  material  prosperity  have  risen  to 
praise  the  simple  life,  and  to  declare  that  happiness  dwells 
not  outside  of  men,  that  they  must  seek  it  within. 

Wise  consumption  depends  not  alone  on  physical  pleasures 


Ch.  37]  WASTE  AND  LUXURY  477 

but  on  the  spiritual  unity  of  the  uses  made  of  goods.  Happi- 
ness and  character  are  akin  in  the  qualities  of  simplicity  and 
unity.  Happiness,  so  far  as  it  depends  on  wealth,  is  a  har- 
mony of  gratifications.  Character  is  a  harmony  of  actions. 
A  successful  life  is  a  group  of  complementary  deeds.  There 
can  be  no  harmony,  without  a  central,  simple,  guiding  prin- 
ciple. The  wise  and  moral  use  of  goods  and  the  economic  use 
of  them  have  much  in  common.  The  results  of  the  choice  of 
goods  are  reflected  in  the  health,  intelligence,  happiness,  moral- 
ity, and  progress  of  society. 

The  spending  of  income  for  display  has  never  been  very 
successfully  forbidden  by  law.  The  Middle  Ages  are  full  of 
futile  sumptuary  laws  which  sprang  from  the  envy  the  nobles 
had  for  the  wealthy  merchants.  The  growth  of  good  taste 
may  do  what  formal  law  found  impossible.  In  these  days  even 
when  luxury  in  some  respects  is  increasing,  the  use  of  great 
wealth  takes  more  social  directions.  It  turns  from  dress  to- 
ward education,  art,  music,  and  travel ;  then  ceases  to  be  ap- 
plied merely  to  self  and  family,  and  benefits  the  community. 
Nowhere  else  and  never  before  has  this  movement  gone  so 
far  as  in  America  with  the  gifts  of  millions  annually  for  edu- 
cation, libraries,  art,  scientific  and  medical  research,  and  for 
social  betterment. 

§  12.  The  question  of  justice.  "We  leave  untouched  here 
the  larger  moral  problem  involved  in  luxury.  It  concerns  the 
justice  of  large  incomes  rather  than  their  spending.  Most  of 
the  enemies  of  luxury  condemn  all  expenditure  of  wealth 
above  a  very  moderate  sum,  declaring  that  it  is  "unjust"  for 
one  man  to  have  much  while  others  are  in  poverty.  This  com- 
munistic doctrine  pervades  the  teaching  of  many  moral 
teachers,  pagan  and  Christian.  The  question  of  luxury  leads 
back  to  the  question  of  distribution :  Has  the  man  honestly 
gained  his  wealth  ?  If  so,  he  may  spend  it  with  good  judgment 
or  poor,  with  good  taste  or  bad,  but,  so  long  as  he  does  not 
injure  others  in  the  spending  of  it,  there  is  much  vagueness 
and  confusion  in  the  talk  of  "justice"  or  "injustice."    Each 


478  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Pt.  VI 

must  in  large  measure  be  his  own  judge  of  the  wisdom  of  ex- 
penditure. If  expenditures  were  regulated  by  the  public,  few 
persons  would  be  within  the  law.  But  whatever  the  goods  that 
are  bought,  if  large  incomes  are  acquired  without  social  serv- 
ice, there  may  well  be  talk  of  injustice. 

§  13.  Animal  choice.  The  problems  of  human  life  and 
conduct  are  never  quite  simple  and  there  is  another  side  to 
the  question  of  luxury.  Its  frankest  defenders,  while  recog- 
nizing the  fallacy  of  the  make-work  argument,  and  admitting 
its  dangers  to  the  individual,  claim  that  in  its  general  effects 
it  is  a  great  incentive  to  economic  progress.  There  the  argu- 
ment for  luxury  has  some  validity,  and  to  appraise  it  better, 
let  us  recall  the  function  of  developing  desires  in  impelling 
men  to  greater  effort. 

Choice  among  animals  depends  on  the  environment;  that 
is  to  say,  all  that  the  creatures  below  man  can  do  is  to  take 
things  as  they  find  them.  And  so  the  environment  shapes  and 
affects  the  animal.  The  fish  is  fitted  to  live  in  the  water,  and 
suffers  and  dies  if  long  out  of  it.  The  horse  and  the  cow  like 
best  the  food  of  the  fields.  And  so  each  species  of  animal,  in 
order  to  survive  in  the  severe  struggle  for  existence,  has  been 
forced  to  fit  itself  to  the  conditions  in  which  it  lives.  After 
the  animal  has  been  thus  fitted,  its  choice  is  for  those  things 
normally  to  be  found  in  its  surroundings.  So  different  ani- 
mals choose  different  things,  but  in  most  cases  it  is  the  en- 
vironment that  determines  the  choice,  and  not  the  choice  that 
shapes  the  environment.  However,  migration  with  the  chang- 
ing seasons,  or  in  search  of  food,  is  a  most  effective  method 
by  which  the  animals,  led  by  their  instincts,  bring  about 
a  change  in  their  environment;  and  many  other  methods  are 
employed,  such  as  nest-making  and  food-storing. 

§  14.  Choice  by  primitive  men.  In  simpler  human  soci- 
eties, choices  are  mostly  confined  to  physical  necessities;  that 
is,  in  the  earlier  stages  of  society,  man's  choices  are  very 
much  like  those  of  the  animals.  Man,  like  the  animals,  feels 
the  pangs  of  hunger  and  he  strives  to  secure  food.    He  yearns 


Ch.  37]  WASTE  AND  LUXURY  479 

for  companionship,  for  it  is  only  through  association  and 
mutual  help  that  men,  so  weak  as  compared  with  many  kinds 
of  animals,  are  able  to  resist  the  enemies  which  beset  them. 
He  needs  clothing  to  protect  him  against  the  harsher  climates 
of  the  lands  to  which  he  moves.  To  protect  himself  against  the 
cold  and  rain,  he  needs  a  shelter — a  cave,  a  wigwam,  or  a  hut. 
Man  is  thus  impelled  to  bend  his  energies  to  the  choice  of  the 
things  necessary  to  survival. 

In  the  rudest  societies  of  which  there  is  any  record,  savages 
are  found  with  desires  developed  in  many  directions  beyond 
those  of  any  animals.  Men  are  not  passive  victims  of  cir- 
cumstances; their  desires  are  not  determined  solely  by  their 
environment,  but  are  drawn  to  things  beyond  and  outside  of 
the  provisions  of  nature. 

§  15.  Desires  and  progress.  As  men  become  more  the 
masters  of  circumstances,  their  desires  anticipate  mere  phys- 
ical needs;  they  seek  a  more  varied,  food  of  finer  flavor  and 
more  delicately  prepared.  Dress  is  not  limited  by  physical 
comfort,  but  becomes  a  means  of  personal  ornament.  ^len 
seek  and  choose  the  beautiful  in  sound,  in  form,  in  taste,  in 
color,  in  motion.  The  rude  hut  or  communal  lodge  to  protect 
against  rain  and  cold  becomes  a  home.  Out  of  the  earlier  rude 
companionship  develop  the  sentiments  of  friendship  and  fam- 
ily life.  And  finally,  as  the  imagination  and  intellect  de- 
velop, there  grow  up  the  various  forms  of  intellectual  pleas- 
ures— the  love  of  reading,  of  study,  of  travel,  and  of  thought. 
Desires  develop  and  transform  the  world. 

In  recent  discussion  of  the  control  of  the  tropics,  the  too 
great  contentedness  of  tropical  peoples  has  been  brought  out 
prominently.  It  has  been  said  that  if  a  colony  of  New  Eng- 
land school-teachers  and  Presbyterian  deacons  should  settle 
in  the  tropics,  their  descendants  would,  in  a  single  generation, 
be  wearing  breech-clouts  and  going  to  cock-fights  on  Sunday. 
Certain  it  is  that  the  energy  and  ambition  of  the  temperate 
zone  are  hard  to  maintain  in  warmer  lands.  The  negro's  con- 
tentedness with  hard  conditions,  so  often  counted  as  a  virtue,  is 


480  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Pt.VI 

one  of  the  difficulties  in  the  way  of  solving  the  race  problem  in 
our  South  to-day.  Booker  T.  Washington  and  others  who 
are  laboring  for  the  elevation  of  the  American  negroes,  would 
try  first  to  make  them  discontented  with  the  one-room  cabins 
in  which  hundreds  of  thousands  of  families  live.  If  only  the 
desire  for  a  two-  or  three-room  cabin  can  be  aroused,  experi- 
ence shows  that  family  life  and  industrial  qualities  may  be 
improved  in  many  other  ways. 

§  16.  Function  of  modem  discontent.  Not  only  in  Amer- 
ica, but  in  most  civilized  lands  to-day,  is  seen  a  rapid  growth 
of  desires  in  the  working-classes.  The  incomes  and  the  stand- 
ard of  living  have  much  of  the  time  been  increasing,  but  not  so 
fast  as  have  the  desires  of  the  working-classes.  Eegret  has 
been  expressed  by  some  that  the  workers  of  Europe  are  be- 
coming "declassed."  Increasing  wages,  it  is  said,  bring  no 
welfare,  but  unhappiness,  to  the  complaining  masses.  If  dis- 
content with  one 's  lot  goes  beyond  a  moderate  degree,  if  it  is 
more  than  the  desire  to  better  one's  lot  by  personal  efforts, 
if  it  becomes  an  unhappy  longing  for  the  impossible,  then  in- 
deed it  may  be  a  misfortune.  But  a  moderate  ambition  to  bet- 
ter the  conditions  of  one's  self,  of  one's  family,  or  of  society, 
is  the  ** divine  discontent"  absolutely  indispensable  if  energy 
and  enterprise  are  to  be  called  into  being. 

It  is  a  suggestive  fact  that  civilized  man,  equipped  with 
all  of  the  inventions  and  the  advantages  of  science,  spends 
more  hours  of  effort  in  gaining  a  livelihood  than  does  the 
savage  with  his  almost  unaided  hands.  Activity  is  dependent 
not  on  bare  physical  necessity,  but  on  developed  desires.  If 
society  is  to  develop,  if  progress  is  to  continue,  human  desire, 
not  of  the  grosser  sort,  but  ever  more  refined,  must  continue 
to  emerge  and  urge  men  to  action. 

§  17.  Luxury  as  an  incentive  to  progress.  It  is  impos- 
sible to  know  just  how  important  the  service  of  luxury  as  a 
pacemaker  has  been  in  this  progress  in  the  past,  tho  doubtless 
it  has  been  great.  But  what  is  needed  now  is  a  rising  standard 
of  taste  in  the  lives  of  the  many,  not  excessive  display  or 


Cn.  37]  WASTE  AND  LUXUEY 


481 


indulgence  by  the  few.  But  a  dead  level  of  conditions  seems 
to  be  unfavorable  to  invention,  arts,  and  industry.  There 
must  be  some  motive  for  emulation,  and  for  ambition  to  attain 
finer  material  means  of  enjoyment  after  the  bare  necessities  of 
life  are  provided,  or  no  new  forms  of  wealth  will  be  demanded. 
Necessities,  strictly  understood,  are  things  absolutely  essential 
to  life  and  health.  No  hard  line  can  be  drawn  between  neces- 
sities and  comforts,  between  comforts  and  luxuries.  The  level 
rises ;  it  is  a  trite  and  true  saying  that  the  luxuries  of  one  age 
become  the  necessities  of  the  next.  The  rise  of  the  bathtub  in 
the  nineteenth  century  is  an  epitome  of  the  progress  of  civili- 
zation in  that  period.  The  free  baths  in  our  cities  surpass  the 
hopes  of  the  wealthy  of  a  century  ago.  The  automobile  was  first 
the  toy  of  the  rich,  but  is  becoming  the  necessity  of  daily  life. 
Even  the  meaner  motives  of  envy  may  have  their  social  and  eco- 
nomic functions.  The  lower  social  grades,  emulous  of  the 
higher  standard  held  before  them,  labor  with  greater  energy. 
The  successful  and  capable  enterprisers,  not  content  with 
necessities,  continue  to  give  their  efforts  to  production.  Even 
abstinence  may  be  stimulated  by  the  hope  of  attaining  for  one's 
self  and  one's  family  the  imaginary  joys  of  conspicuous  dis- 
play. Doubtless  these  effects  are  more  or  less  offset  by  the 
temptations  to  live  beyond  one's  income,  and  to  seek  wealth  in 
devious  ways  to  make  luxury  possible.  Still,  luxury  in  a 
moderate  measure  has  had,  and  still  has,  a  part  among  the 
forces  of  dynamic  society. 


CHAPTER  38 
ABSTINENCE  AND  PRODUCTION 

§  1.  Dynamic  movement  of  saving.  §  2.  Orderly  government  favorable 
to  saving.  §  3.  Private  property  favorable  to  saving.  §  4.  Opportunities 
for  investment.  §  5,  Get-rich-quick  schemes.  §  6.  Slower  and  safer 
plans.  §  7.  Relation  of  the  interest  rate  and  saving.  §  8.  Bountiful  in- 
come and  abstinence.  §  9.  The  interest  rate  and  waiting.  §  10.  Dupli- 
cate agents  and  slower  processes.  §  11.  Lower  interest  rate  stimulating 
invention.  §  12.  Time-price  determining  the  selection  of  processes.  §  13. 
Newly  discovered  process;  effect  upon  interest  rate,  §  14.  Railroad 
betterments  and  the  rate  of  interest.  §  15.  Effect  of  war  upon  the  in- 
terest rate. 

§  1.  Dynamic  movement  of  saving.  Let  us,  finally,  ex- 
amine the  influence  for  dynamic  change  that  is  exerted  by 
man's  choice  and  use  of  goods  with  relation  to  time.  We  have 
already  considered  time-preference  from  the  individual  stand- 
point (Chapter  24),  and  have  seen  how  with  varying  de- 
grees of  abstinence  the  individual's  fortune  may  be  main- 
tained, or  decline,  or  advance.  In  the  community  as  a  whole, 
individual  time-choices  more  or  less  neutralize  each  other. 
Prodigality  versus  abstinence,  spending  versus  saving,  of  all 
the  members  of  the  community  taken  together,  have,  as  a  re- 
sultant, the  maintenance  or  the  reduction  or  the  accumulation 
of  economic  agents.  Accompanying  this  movement  more  or 
less  closely,  now  ahead  and  now  lagging  behind,  go  changes  in 
the  rate  of  time-price  as  shown  in  the  rate  of  interest.  Let  us 
look  first  at  some  conditions  favorable  to  saving,  and  then  at 
some  adverse  movements,  making  for  the  lowering  of  the 
economic  environment. 

Abstinence  varies  from  man  to  man  and  from  one  period  to 
another,  but  there  are  certain  general  conditions  that  appear 

482 


Ch.  38]  ABSTINENCE  AND  PRODUCTION 


483 


to  be  favorable  to  the  development  of  abstinence  as  a  wide- 
spread habit  of  mind  in  society,  and  that  contribute  up  to  a 
certain  point,  to  a  general  state  of  accumulation. 

§  2.  Orderly  government  favorable  to  saving.  As  saving 
results  from  a  comparison  of  the  future  with  the  present,  any 
lack  of  certainty  regarding  the  future  decreases  the  appeal  it 
makes.  The  theory  of  probabilities  applies  roughly  in  this 
matter,  and  a  use  is  only  half  as  great  when  there  is  but  one 
chance  in  two  of  ever  getting  it.  Political  security  against 
foreign  aggression  is  favorable  to  saving.  War  is  not  only 
destructive  of  wealth  and  of  industry  in  the  zone  of  conflict, 
but  it  weakens  the  motives  of  thrift  in  the  citizen.  The 
energies  of  the  people  are  given  to  fighting  and  to  preparation 
for  fighting,  and  the  national  resources  are  used  regardless 
of  the  future  need.  Domestic  order  is  favorable  to  saving. 
Where  there  are  frequent  revolutions  as  in  some  countries  and 
periods  in  South  America,  and  where  brigandage  is  common, 
as  it  has  been  in  Italy,  Macedonia,  and  Bulgaria,  the  motive 
for  saving  is  greatly  weakened.  Oppressive  government,  es- 
pecially when  it  takes  the  form  of  irregular  taxation,  decreases 
the  certainty  of  income  and  in  that  proportion  weakens  the 
motive  for  the  accumulation  of  property.  While  the  miserable 
subjects  of  the  state  live  from  hand  to  mouth,  the  very  sources 
of  the  public  revenue  disappear.  Improvidence  grows  upon 
such  a  people  into  a  prevailing  national  custom;  ambition  is 
wanting ;  industry  is  the  sport  of  chance ;  economic  order  and 
economic  prosperity  are  impossible. 

§  3.  Private  property  favorable  to  saving.  Social  institu- 
tions that  give  a  motive  to  the  individual  seem  to  be  essential 
to  effective  and  continuous  saving.  Among  these  institutions 
the  most  important  are  the  family  and,  closely  connected  with 
it,  the  institution  of  private  property.  The  effect  of  this  m 
its  best  manifestations  is  to  fix  the  responsibility  for  each  per- 
son's  economic  welfare  upon  himself  or  upon  his  family. 
Through  the  institution  of  private  property  the  state  says  to 
men  •    "  Save  if  you  will ;  the  wealth  and  its  future  fruits  shall 


484  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Pt.  VI 

be  yours.  But  if  you  spend  in  the  present,  you  alone  will 
suffer  the  consequences."  The  institution  of  private  property 
never  is  found  in  an  ideal  form.  Corrupt  public  officials 
weaken  its  working,  dishonesty  in  business  and  the  oppressive 
monopolistic  power  of  a  few  exaggerated  private  fortunes 
reduce  its  benefits.  Every  propertyless  family  marks  a  partial 
failure  in  its  purpose.  These  limitations,  pretty  generally 
admitted,  have  made  private  property  a  favorite  object  of 
attack  by  radical  reformers.  Its  abolition  has  been  advocated 
from  the  days  of  ancient  Greece  to  our  own  days,  as  the 
remedy  for  all  the  great  social  ills.  We  are  not  concerned 
here  with  the  moral  judgment  of  the  question,  but  with  the 
pure  economic  aspect.  Private  property  gives  men  an  in- 
centive to  subordinate  their  present  desires  to  the  future. 
Private  property  has  served  to  fix  responsibility  for  waste  and 
improvidence  and  to  multiply  the  rewards  of  abstinence.  His- 
tory shows  as  yet  no  communities  where  any  other  motive  has 
been  effective  in  inducing  large  numbers  of  men  regularly  to 
conserve  economic  agents  and  in  maintaining  a  progressive 
economic  state. 

§  4,  Opportunities  for  investment.  Opportunities  for  the 
investment  of  small  savings  favor  the  spread  of  a  spirit  of 
saving.  The  institution  of  small  property,  peasant  propri- 
etorship, has  worked  powerfully  in  this  direction  in  many  parts 
of  Europe;  and  the  same  effects  have  resulted  in  America 
from  the  wide  diffusion  of  property  in  agricultural  land.  If 
the  decline  in  the  number  of  small  independent  farmers  has 
somewhat  weakened  this  influence  in  America,  other  agencies 
are  effectively  performing  the  same  functions  in  other  ways. 
Savings-banks,  penny  banks,  building  and  loan  associations, 
penny-provident  funds,  and  other  convenient  means  of  invest- 
ing small  sums,  encourage  men  to  reduce  their  tobacco  bills, 
their  candy  bills,  their  saloon  bills,  and  to  lay  aside  for  the 
winter's  coal,  for  the  children's  education,  for  houses,  for  busi- 
ness investments,  or  for  old  age.  The  French  government,  by 
the  sale  directly  to  the  people  of  national  bonds  in  small  de- 


Ch.  38]  ABSTINENCE  AND  PRODUCTION  485 

nominations,  both  recognized  and  helped  to  strengthen  a  cus- 
tom of  thrift  in  the  small  investor  that  has  probably  become 
more  widespread  in  France  than  in  any  other  country.  Prob- 
ably no  one  thing  has  given  a  greater  stimulus  to  saving  than 
has  the  development  of  insurance  and  the  endowment  policies 
in  connection  with  it.  The  modern  systems  of  compulsory 
accident  and  sickness  insurance,  and  of  pensions  for  old  age, 
are  accumulating  large  funds  (invested  in  securities)  and  are 
collective  saving  on  a  large  scale  (whether  it  be  deemed  the 
saving  by  employers  or  by  employees).  Great  modern  cor- 
porations have  displaced  many  small  business  enterprises  into 
which  so  much  of  the  saving  of  the  past  was  put,  but  have 
opened  up  other  large  fields  of  choice  for  investors  in  notes, 
bonds,  and  stocks.  Of  late  some  American  corporations  and 
governments  have  begun  to  issue  bonds  in  denominations  of 
less  than  $1000,  known  as  "baby  bonds,"  especially  of  $100 
and  $500,  and  their  sale  is  steadily  increasing. 

§  5.  Get-rich-quick  schemes.  Nothing  discourages  absti- 
nence more  than  the  example  of  the  loss  of  hard-won  savings 
through  unfortunate  investments,  as  happens  with  many  mil- 
lion dollars  of  small  capitals  every  year.  A  large  part  of  these 
losses  would  be  avoided  if  certain  simple  truths  were  generally 
recognized  and  certain  maxims  observed.  Security  against 
loss  of  principal  is  more  important  than  promises  of  a  large 
interest  rate.  It  is  well  to  remember  that  the  prevailing 
rate  of  capitalization  in  the  community  sets  the  outside  limit 
of  safe  investment  to  the  investor  without  special  knowledge 
and  judgment  of  the  conditions.  Unusual  percentages  of  in- 
come (over  4  or  5  per  cent)  are  bought  by  the  small  investor 
at  the  cost  of  disproportionate  chances  of  loss.  Buying  stocks 
on  margin,  real  estate  on  options,  or  anything  partly  on  credit, 
is  not  true  investing ;  it  is  speculation,  and  the  chance  is  large 
that  it  will  end  in  disaster  to  the  "outsider"  and  the  "lamb." 
The  stranger  offering  remarkable  returns  on  smaU  investments 
has  almost  certainly  a  flaw  either  in  his  judgment  or  in  his 
morality.     There  are  now  and  then  good  inventions  which  need 


1 


486  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Pt.  VI 

but  capital  to  develop  them,  but  to  judge  their  practical  merits 
requires  expert  knowledge  and  business  experience  or  influence 
which  few  possess.  Only  with  the  advice  of  trusted  friends 
with  these  advantages  should  the  inexperienced  venture  to  in- 
vest outside  of  accustomed  lines  in  the  hope  of  unusual  returns. 
" Get-rieh-quick  schemes"  mean  get-poor-quick  for  every  one 
but  their  promoters.  Patents  from  washing  machines  to  chro- 
matic printing,  new  processes  from  burning  ashes  to  extracting 
gold  from  sea  water,  lead  mines  and  gold  mines  which  prove 
only  to  be  ** salted"  mines,  rubber  plantations  with  elastic  pos- 
sibilities, electric  "air  line"  roads  destined  ever  to  remain  in 
air — these  projects  yearly  lure  millions  of  small  savings  from 
the  trusting, 

§  6.  Slower  and  safer  plans.  The  average  man  investing 
outside  of  his  own  business  should  travel  the  well-marked 
roads :  government,  state  and  municipal  bonds ;  stocks,  or  pref- 
erably bonds,  of  the  more  conservative  corporations  bought 
outright  at  other  than  times  of  booming  business  and  high 
capitalization;  real-estate  mortgages  in  the  neighborhood  or 
placed  through  reliable  agencies;  shares  in  building  and  loan 
associations;  deposits  in  savings  banks;  life  insurance  for 
breadwinners,  first  and  mainly  on  the  ''ordinary  life"  plan  or 
with  payments  limited  to  the  earning  years;  and  finally,  old 
age  pensions  and  life  annuities.  Carefully  selected  invest- 
ments along  these  lines  will  yield  to  the  average  man  in  the 
long  run  much  more  than  more  active  investments  with  the 
alluring  promises  of  large  dividends.  If  the  small  savings  of 
the  masses  were  more  safe  and  remunerative,  a  wonderful 
stimulus  would  be  given  to  industry,  and  the  general  welfare 
would  be  enhanced.  In  part  no  doubt  this  most  desirable  end 
can  be  furthered  by  public  regulations  in  protection  of  inves- 
tors, in  part  it  must  be  brought  about  by  the  progress  of  sound 
principles  of  investment  among  persons  of  small  means. 

§  7.  Relation  of  the  interest  rate  and  saving.  A  question 
much  debated  is:  should  a  rate  of  interest  be  looked  upon  as 
the  cause  of  saving.     Some  persons  might  be  willing  to  save 


Ch.  38]  ABSTINENCE  AND  PRODUCTION  '  437 

somewhat  were  the  rate  of  interest  much  lower,  just  as  (on 
the  hypothetical  sellers'  curve)  some  sellers  might  have  been 
willing  to  sell  for  less  than  the  market  price  if  they  had 
not  found  buyers  willing  to  pay  the  actual  price.  In 
every  loan  market  the  price  comes  to  equilibrium  at  a  point 
lower  than  some  borrowers  would  have  consented  to  pay,  and 
higher  than  some  lenders  would  have  consented  to  take.  If 
the  rate  were  much  lower  there  would  be  many  more  borrowers 
and  many  fewer  lenders.  A  higher  rate  reduces  the  number 
of  borrowers  and  increases  the  number  of  lenders ;  borrowing 
is  by  so  much  discouraged  and  abstinence  is  given  a  larger 
premium,  a  reward  for  waiting.^ 

A  high  interest  rate  does  not  insure  a  high  degree  of  cumu- 
lative abstinence  in  a  community ;  it  is  indeed  nothing  but  the 
visible  index  of  a  low  degree  of  abstinence  (a  high  rate  of 
time-preference),  and  interest  will  remain  high  till  abstinence 
grows.  The  rate  of  interest  marks  the  point  of  equilibrium 
in  the  market  between  present  and  future  value  of  incomes, 

1  A  man  carries  a  dollar  in  his  pocket  on  a  journej'  without  getting 
interest,  but  he  (now)  values  the  future  purchase  more  than  the  present 
purchase.  Likewise,  by  persons  ignorant  of  banks,  dollars  are  some- 
times laid  away  for  sickness,  old  age,  and  other  needs  without  the 
inducement  of  interest.  The  owner  might  even  be  imagined  to  pay 
for  the  safekeeping  of  the  money  in  the  meantime.  Some  have  made 
much  of  these  cases,  have  called  hoarding  a  case  of  zero  interest,  and 
the  payment  of  storage  charges  a  case  of  negative  interest.  These  are 
not  cases  of  interest  at  all  hy  our  definition,  they  are  cases  of  time- 
preference  for  future  money.  The  zero  rate  of  time-preference  does 
not  extend  to  goods  generally,  for  this  would  mean  an  absolutely  indif- 
ferent choice  between  present  and  future  uses,  gratifications  and  goods, 
and  an  infinite  capital  value  for  the  smallest  permanent  series  of  incomes. 
(See  above,  under  time-value.)  These  acts  of  saving  money  occur  at  a 
time  when  the  individual  is  showing  time-preference  for  the  present 
in  numberless  ways.  In  these  cases  the  money  is  for  the  time  being 
withdrawn  from  its  use  as  a  medium  of  exchange  and  is  turned  to  its 
use  as  a  storehouse  of  saving.  Like  fruit  in  a  plentiful  season  and 
ice  stored  in  winter  it  is  kept  because  it  is  relatively  plentiful  now,  and 
a  part  of  it  if  kept  will  provide  necessities  for  a  time  of  relative 
scarcity. 


488  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Pt.VI 

like  the  pointer  on  the  spring  balances.  A  fall  in  the  rate  of 
interest  is  not  so  much  the  cause  of  lessened  saving  in  the 
community  as  a  whole  as  it  is  the  effect  of  increased  saving. 
The  causal  order  is  from  the  growth  of  the  spirit  of  saving  in 
large  classes  to  a  falling  interest  rate,  which  continues  to  fall 
as  long  and  as  far  as  the  cause  is  operative  or  is  not  offset 
by  the  acts  of  others.  The  truth  in  the  view  that  a  fall  in  the 
interest  rate  decreases  saving  is  this:  that  a  fall  in  the  rate 
of  interest  may  cause  some  individuals  to  save  less.  The  fall 
is  the  resultant  of  the  acts  of  other  individuals  who  are  willing 
to  go  on  saving  at  a  lower  rate  of  interest  than  some  other 
individuals  are. 

True,  custom,  example,  and  training  have  so  fixed  the  habit 
of  saving  in  many  individuals  that  they  would  continue  to 
accumulate  just  as  much  after  the  rate  of  interest  fell.  It  is 
even  conceivable  that  a  few,  in  middle  life,  with  a  pretty 
definite  idea  of  the  amount  of  money  income  needed  for  a  com- 
petence in  old  age,  or  to  leave  to  their  children,  might  be 
spurred  to  yet  greater  efforts  when  the  investment  premium 
fell.  But  this  must  be  confined  to  a  peculiar  group  of  persons 
at  a  particular  stage  in  their  lives  and  is  not  characteristic 
of  the  whole  community.  Abstinence  may,  like  jealousy,  grow 
by  what  it  feeds  on,  but  only  in  some  few  older  natures,  not 
in  the  ever-renewing  generations.  It  is  not  true  of  men  in 
general  that  the  longer  they  have  to  wait  for  income  the  easier 
they  find  it  to  wait. 

Lending  at  interest  was  formerly  very  generally  prohibited 
and  the  rate  of  interest  was  always  high  in  those  times. 
"Well-meaning  reformers  are  always  proposing  the  prohibition 
of  interest  as  a  remedy  for  social  ills.  If  this  were  done  those 
savers  who  could  buy  and  manage  the  agents  themselves  would 
still  have  strong  motives  for  abstinence,  but  those  who  could 
not  be  active  managers  themselves  would  be  deprived  of  the 
stimulus  of  a  premium  for  saving.  In  itself  the  mere  prohibi- 
tion of  contract  interest  would  tend  toward  a  lowering  of  the 


Ch.  38]  ABSTINENCE  AND  PRODUCTION  489 

quality  of  the  environment,  and  this  would  result  in  a  higher 
rate  of  time-preference. 

§  8.  Bountiful  income  and  abstinence.  Another  question 
that  has  proved  puzzling  is  as  to  the  relation  between  the 
amount  of  income  a  man  enjoys  and  the  degree  of  abstinence. 
For  if,  as  income  increases,  abstinence  becomes  easier,  then 
improved  methods  of  industry  should  have  cumulative  effects— 
not  only  making  possible  a  larger  sum  of  goods  to  enjoy 
now,  but  multiplying  the  amount  of  saving  to  produce  other 
goods,  and  constantly  lowering  the  rate  of  interest. 

True,  it  is  easier  for  a  man  with  habits  of  life  somewhat  fixed 
to  save  more  when  his  income  rises.  (See  above.  Chapter 
24.)  But  it  is  not  safe  to  say  as  much  of  men  altogether, 
where  the  younger  generation  has  time  to  adjust  its  tastes  to 
the  larger  income.  A  community  does  not  grow  old  in  the 
same  way  that  an  individual  does.  (See  above,  under  statics 
and  dynamics.  Chapter  32,  section  2,  on  renewal  of  the  gen- 
erations.) "The  children  are  always  new"  and  each  genera- 
tion starts  where  its  fathers  left  off.  For  this  reason  there 
appears  to  be  little  relation  discoverable  in  history  between 
the  bountifulness  of  incomes  in  successive  generations  (through 
the  discovery  of  richer  lands,  the  use  of  better  tools,  ma- 
chinery and  methods)  and  the  rate  of  time-preference.  Such 
differences  in  the  interest  rate  as  appear  can  be  explained 
through  the  changing  conditions  more  or  less  favoring  saving, 
rather  than  by  the  productiveness  of  industry  in  a  community. 
Amount  of  production  is  only  one  factor  in  determining  the 
rate  of  time-preference  from  generation  to  generation,  and  not 
the  primary  factor.  And  so,  while  interest  was  less  in  the 
seventeenth  century  in  some  European  countries  than  it  had 
been  for  centuries  before,  it  does  not  seem  to  have  fallen  much, 
if  any,  in  the  chief  commercial  centers  during  the  last  two 
centuries,  while  enormous  strides  have  been  made  in  the  pro- 
ductiveness of  industry.  It  has  been  a  matter  of  wonderment 
to  social  students  that  the  rate  of  interest  continued  so  high 


490  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Pt.VI 

in  the  United  States  (higher  than  in  Europe)  in  the  last  half 
of  the  nineteenth  century,  when  the  general  level  of  incomes 
was  so  much  higher  than  in  the  countries  of  Europe,  or  in  any 
other  country  in  the  world  theretofore.  In  fact,  a  very  large 
portion  of  the  American  people  have  not  been  contributing  in 
any  degree  to  cumulative  saving ;  rather  they  have  been  heed- 
lessly consuming  fully  their  own  comparatively  large  incomes 
made  possible  by  and  drawn  from  the  consumption  and 
destruction  of  the  natural  resources  of  the  country.  (See 
Chapter  35.)  The  premium  on  the  present  as  compared 
with  the  future  may  thus  be  just  as  high  or  higher  when 
many  men  are  living  in  great  bounty  as  when  all  are 
in  a  meager  environment.  When  they  have  large  incomes 
they  may  save  a  smaller  proportion  of  what  they  have,  and 
yet  possibly  continue  to  accumulate  more  rapidly  than  when 
their  incomes  were  smaller.  Moreover,  a  large  part  of  recent 
progress  has  been  through  the  invention  of  simpler  and  better 
methods  rather  than  through  mere  multiplication  of  old  ap- 
pliances. Time-preference  is  a  psychological  factor,  which 
can  not  be  explained  by  physical  productivity.  The  attitude 
of  men  toward  their  environment  has  tremendous  economic 
consequences. 

§  9.  The  interest  rate  and  waiting.  Let  us  now  review 
some  familiar  facts  to  see  the  interrelations  of  abstinence, 
capitalization,  and  the  rate  of  interest,  and  the  dynamic  effect 
that  the  choice  of  technical  methods  of  production  eventually 
has  in  a  community. 

Individual  rates  of  time-preference  unite  into  a  market  rate 
of  time-price  expressed  primarily,  in  the  case  of  durative 
agents,  by  the  capitalization  of  the  series  of  incomes.  The 
capitalization  of  a  series  of  incomes  treated  as  perpetual  is 
exactly  in  the  ratio  of  the  years'  purchase.  The  rate  of  in- 
terest that  arithmetically  corresponds  with  this  is  the  recip- 
rocal of  the  years'  purchase  (e.g.,  y2o  =  .05).  Practically 
by  the  law  of  substitution  as  applied  to  investments,  interest 
rates  and  capitalization  rates  are  brought  into  correspondence. 


Ch.  3S] 


ABSTINENCE  AND  PRODUCTION 


491 


With  each  reduction  of  the  time -price  goes  an  identical  arith- 
metic change  in  the  rate  of  interest  and  a  reciprocal  increase 
in  the  capital  sum,  and  a  proportional  decrease  in  the  frac- 
tion of  capital  investment  coming  to  the  owner  as  income. 
The  greater  the  degree  of  abstinence,  the  smaller  the  fraction 
of  investment  value  that  owners  must  take  as  income,  the 
longer  they  must  wait  for  an  income  hearing  a  given  propor- 
tion of  the  capital,  or  equal  to  it,  to  accrue.  The  number  of 
years'  purchase,  therefore,  might  well,  in  this  connection,  be 
called  the  waiting  time,  or  waiting-period.     (See  Figure  60.) 


^'  '9  shows  »dded  waiting  period 

for  each  successive  fall  of  I  per  cent 
in  the  nte  of  interest 


Fig.  60.  Interest  Bates  and  Coekespondino  Waiting  Pebiods. 
Now  let  the  time-price  rate  be  twelve  and  corresponding 
with  that  would  be  a  rate  of  interest  on  money  loans  of  twelve, 
and  a  capitalization  of  $8.33  for  each  $1  of  income.  If  the 
spirit  of  abstinence  grows  and  extends  in  the  community  from 
whatever  combination  of  favoring  conditions,  so  that  the  time- 
price  rate  of  10  (or  any  lower  figure)  results,  the  change  is 
registered  in  a  corresponding  rate  of  interest  of  10  per  cent 
and  the  capitalization  of  each  dollar  of  income  at  $10.  This 
shows  itself  first  in  the  capitalization  of  all  existing  incomes 
(capable  of  capitalization),  and  would  do  so  if  there  were  no 
technical,  productive  process  whatever,  merely  a  limited  num- 
ber of  incomes.  All  future  durative  uses  attributable  to  agents 
are  marked  up  in  present  price.    There  are  ' '  takers ' '  for  cap- 


492  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Pt.VI 

ital  now  that  will  yield  incomes  but  M.o  of  its  face,  or  what 
is  the  same  thing,  persons  willing  to  have  the  same  income 
spread  over  1%  years  longer,  i.e.,  10  years  instead  of  8%  years. 
This  must  cause  some  transfers  of  capital,  for  not  all  indi- 
viduals have  reduced  their  time-preference  rate,  and  some  will 
yield  to  the  temptation  to  get  $10  of  present  capital,  whereas 
they  could  have  resisted  the  offer  of  $8.33.  The  lower  the 
interest  rate  the  greater  the  temptation  for  the  less  abstinent 
members  of  the  community  to  relinquish  to  the  more  abstinent 
the  guardianship  of  future  incomes  with  its  task  of  wait- 
ing. 

§  10.  Duplicate  agents  and  slower  processes.  Another 
effect  must  show  itself  in  the  technical  methods  of  production. 
The  time-price  signals  that  there  are  investors  ready  to  wait 
longer  for  the  same  income  from  a  given  investment.  There 
are  investors  willing  to  divert  more  present  goods  into  future 
uses,  and  to  impart  to  future  uses  still  more  of  futurity.  This 
adjustment  at  once  begins  in  the  economies  of  all  individuals 
where  time-preference  is  in  accord  with  the  new  rate.  One 
mode  of  adjusting  productive  processes  is  to  multiply  the  tools 
and  agents  already  used.  Duplicates  are  placed  wherever  it 
will  be  most  convenient.  "Where  formerly  the  use  of  a  second 
agent  did  not  justify  its  cost  of  making,  now  it  can  be  made 
to  earn  the  smaller  income^  needed  to  balance  its  capital 
value. 

Another  mode  is  to  let  the  old  processes  go  on  a  little  longer, 

2  This  is  a  net  income,  of  course.  The  new  tool  yielding  less  urgent 
(marginal)  uses  than  the  first  one,  yet  requires  some  shelter  and  re- 
pairs, and  has  as  great  or  greater  liability  to  rust,  decay,  go  out  of 
style,  etc.  With  the  multiplication  of  like  tools,  the  added  units  are 
less  often  used,  and  for  less  urgent  purposes,  yet  the  cost  of  repairs 
and  maintenance  grows  greater,  leaving  a  smaller  net  income  with  each 
increasing  agent  ( see  above,  under  usance ) .  The  more  duplicate  agents 
one  has,  the  greater  the  forethought,  punctuality,  and  watchfulness  re- 
quired to  keep  them  in  good  condition.  If  the  farmer  has  but  one  hoe 
and  one  ax,  they  rarely  rust;  if  a  woman  has  but  one  dress  it  can  not 
be  eaten  by  moths.  The  point  of  best  economic  equilibrium,  however,  is 
shifted  by  the  change  of  time-price  here  under  consideration. 


Ch.  38]  ABSTINENCE  AND  PRODUCTION 


493 


with  no  appreciable  change  in  the  form  of  equipment,  where 
this  will  bring  an  increase  either  in  quantity  or  value  of 
product  and  therefore  enough  more  income  to  repay  the  larger 
period  of  waiting  for  its  arrival.  Unless  other  possible  proc- 
esses and  kinds  of  tools  and  machines  are  already  known 
(have  been  discovered  and  invented)  duplicating  and  slow- 
ing-up  are  the  only  two  ways  of  adjusting  production  to  a 
lower  time-price.  And  nowhere  and  in  no  time  before  the 
modern  period  of  science  and  invention  (say  1700  a.d.)  does 
there  seem  to  have  been  any  crowd  of  unemployed  processes, 
waiting,  so  to  speak,  just  outside  the  gates  of  industry.  So 
it  might  happen  that  a  large  fall  in  the  interest  rate  would 
not  be  quickly  followed  by  any  noticeable  change  in  the  ex- 
ternal forms  of  production,  either  the  machines  or  the  methods. 
Such  a  change  had  to  await  the  slow  process  of  discovery  and 
invention,  to  occupy  this  new  territory  which  abstinence  had 
opened  up  for  settlement.  Great  changes  came  about  by  slow 
adaptations  and  by  accretions  of  new  ideas.  The  simple  truth 
must  not  be  forgotten  that  until  a  better  technical  process  be- 
comes known  it  can  not  be  adopted  even  if  the  rate  of  interest 
were  to  become  zero. 

§  11.  Lower  interest  rate  stimulating  invention.  But  on 
the  other  hand,  a  fall  in  the  rate  of  interest  (and  the  condi- 
tions of  saving  it  reflects)  must  give  a  new  stimulus  to  in- 
vention by  opening  up  a  new  zone  of  waiting  time,  or  in 
other  words,  by  embodying  a  definite  offer  of  investors  to  back 
any  new  method  (whether  more  indirect  or  not)  that  can  be 
found  by  experience  to  lie  between  the  old  standard  and  the 
new  standard  of  waiting  time.  The  lower  the  rate  of  interest, 
the  greater  the  change  in  waiting  time  that  corresponds  with 
a  further  fall  of  1  per  cent.  When  interest  falls  from  10  per 
cent  to  9,  it  means  a  lengthening  of  the  waiting  time  by  only 
11/9  years;  but  when  interest  falls  from  5  to  4,  it  means  a 
lengthening  of  the  waiting  time  by  full  5  years.  With  each 
further  fall  of  1  per  cent  in  the  rate  of  interest  the  extension 


494  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Ft,  VI 

of  waiting  time  goes  on  at  an  accelerating  rate.  At  an  in- 
terest rate  of  1  per  cent  the  waiting  time  would  be  a  hundred 
years,  and  at  an  interest  rate  of  zero  (only  abstractly  conceiv- 
able) the  waiting  time  must  be  infinity.  If  the  interest  rate 
were  to  fall  to  3  and  again  to  2  per  cent  it  would  bring  within 
the  range  of  the  economic  an  almost  inconceivable  number  of 
technical  processes  which  can  not  now  be  used.  Viewed  in  this 
light,  the  remarkable  outburst  of  practical  invention  and  of 
new  industrial  processes  in  western  Europe  (particularly  in 
England)  in  the  eighteenth  century,  seems  to  have  been  partly 
due  to  a  lower  rate  of  interest  (as  compared  with  former 
centuries)  following  the  more  settled  conditions,  the  growth 
of  commerce,  of  banks,  and  of  more  regular  investment  mar. 
kets  in  the  financial  centers. 

This  development  of  invention  has  been  in  turn  greatly  aided 
by  the  progress  of  the  pure  sciences  since  the  seventeenth  cen- 
tury, brought  about  by  investigators  in  universities  and  out- 
side, who  have  continued  to  heap  up  a  great  mass  of  knowledge 
of  nature  from  which  the  practical  arts  can  increasingly  draw. 
To-day  it  is  a  matter  of  common  knowledge  that  there  are  many 
better  technical  ways  of  doing  things  in  every  craft,  ways 
which  "do  not  pay"  under  present  conditions.  Many  of  these 
lie  just  outside  the  border  of  practical,  profitable  utilization. 
A  fall  in  the  rate  of  interest  now  makes  possible  the  adoption 
of  many  technical  processes  that  were  formerly  too  slow  in 
yielding  the  income  on  the  investment.  Partly  this  means  the 
making  of  new  and  better  instruments  which  call  for  a  larger 
initial  outlay  to  secure  a  certain  income,  partly  it  means  the 
choice  of  chemical,  botanical,  mechanical,  electrical,  or  other 
methods  that  yield  larger  results  by  tying  up  the  equipment 
for  a  longer  time.^ 

a  This  change  is  often  said  to  be  one  "to  more  time-consuming 
processes."  This  phrase  is  easily  misleading.  It  can  not  properly  refer 
to  the  length  of  the  technical  jDrocess  itself,  but  merely  to  what  we  here 
call  the  waiting-time  for  a  certain  income  to  mature  on  a  certain  invest- 
ment.    One  technical  process  may  require  only  a  few  days  from  the 


Ch.  38]  ABSTINENCE  AND  PRODUCTION  495 

§  12.  Time-price  determining  the  selection  of  processes. 
Take  now  a  situation  where  there  is  a  prevailing  interest  rate 
with  its  corresponding  equilibrium  of  investment,  and  consider 
what  is  the  effect  of  the  discovery  of  a  new  method  of  produc- 
tion known  to  every  one,*  and  of  the  invention  of  a  machine 
that  calls  for  a  smaller  investment  (even  after  paying  royalty 
to  the  inventor).  Among  many  new  methods  and  new  ma- 
chines, all  degrees  of  advantage  will  be  found  in  all  varieties 
and  combinations,  ranging  from  those  that  require  actually 
less  equipment,  use  less  material,  require  less  labor  for  their 
operation,  shorten  the  time  for  the  process,  reduce  the  number 
of  technical  steps,  increase  the  quantity,  and  improve  the 
quality  of  the  product,  to  the  opposite  in  each  of  these  respects. 
Eegarding  the  change  from  the  old  to  these  new  methods  and 
machines,  two  questions  occur:  (1)  What  determines  where 
the  line  is  drawn  in  making  these  changes  from  old  to  new 
methods?  (2)  What  is  the  effect  of  the  new  methods  upon  the 
existing  degree  of  abstinence? 

So  far  as  this  change  is  rationally  and  wisely  made,  any 
new  method  will  be  adopted  that  will  yield  an  income  falling 
within  the  waiting-zone  corresponding  with  the  interest  rate. 
Of  course  all  of  the  extremely  advantageous  kinds  just  men- 
tioned would  be  adopted,  and  others  up  to  the  limit  of  paying 
investment.  Beyond  that  lie  many  processes  which  are  tech- 
nically possible  but  not  economically  possible.  All  of  the  ex- 
making  of  the  first  machine  to  the  finishing  of  the  product,  it  may  per- 
mit a  turnover  several  times  a  year  (the  making  of  new  machines  to  be 
rapidly  worn  out)  and  yet  "not  pay."  because  it  is  a  slow  income- 
yielding  process.  Whereas  a  machine,  that  lasts  and  a  process  that  goes 
on  for  years  until  the  product  is  ready,  may  yield  income  at  such  a 
rate  that  it  is  economic  when  interest  is  very  high.  (See  ch.  21 
on  the  relation  of  technic  to  time.)  If  the  term  time-consuming  be 
used  at  all  it  must  be  taken  in  an  income-ripening  sense,  not  m  a  tech- 
nically productive  sense. 

4  Trade  secrets,  patents,  and  temporary  monopoly  privileges,  where  the 
better  process  is  limited  to  one  enterprise  or  to  a  few,  aflfect  individual 
profits  at  first  rather  than  the  general  economic  level. 


496  DyNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Pt.  VI 

isting  factors — labor  and  material  resources — are  taken  up, 
put  into  use,  before  these  are  reached.  The  limit  is  set  by  the 
existing  rate  of  time-price,  reflected  in  the  rate  of  interest.  As 
the  rate  of  time-preference  in  the  individual's  choice,  so  the 
rate  of  interest  in  the  community,  draws  a  line  among  the  vari- 
ous technical  processes  analogous  to  the  isothermal  line,  mark- 
ing off  those  that  yield  incomes  at  a  lower  from  those  that  yield 
at  a  higher  time-rate.^ 

§  13.  Newly  discovered  process ;  effect  upon  interest-rate. 
What  effect  would  the  adoption  of  a  newly  discovered  process 
have  upon  the  time-price  rate  ?  °  If  it  takes  a  smaller  equip- 
ment than  the  old,  its  effect  is  that  of  releasing  some  produc- 
tive agents  for  other  processes  before  excluded;  that  is,  it 
enables  a  community  with  the  same  abstinence  to  resort  to 
longer  processes  and  thus  lower  the  time-price.  Or  if  the 
new  method  gives  increase  in  product  with  the  same  invest- 
ment, the  result  is  a  fall  in  the  price  of  the  product,  and  a 
recapitalizing  of  the  sources  of  the  materials,  etc.,  to  bring  in- 
come and  capital  value  into  accord  with  the  prevailing  rate. 
Then  the  question  becomes :  What  effect  will  this  have  on  the 
prevailing  rate  of  time-preference  ?  As  the  total  income  of  the 
members  of  the  community  increases  with  the  more  bountiful 

5  Among  the  processes  always  waiting  on  the  borders  of  utilization, 
known  but  not  adopted,  must  always  be  many  which  are  technically 
more  indirect  than  those  before  in  use;  but  they  have  been  rejected 
not  at  all  because  of  their  technical  indirectness,  but  because  they 
involved  either  too  large  or  too  long  an  investment.  If  the  indirectness 
involves  initial  cost — as  for  materials  to  make  the  complex  parts — 
then  that  influences  time-choice  by  increasing  the  investment;  if  it 
involves  cost  of  operation  because  of  complexity  of  parts  and  difficulty 
of  repairs,  this  influences  time-choice  by  reducing  the  net  income 
expected.  Given  a  certain  investment,  and  a  certain  income  in  the 
future,  and  time-difference  is  the  only  factor  that  influences  choice; 
technical  indirectness  is  a  merely  incidental  element. 

«  Observe  that  we  are  considering  the  case  not  of  a  better  technical 
method  already  known,  and  now  first  adopted  because  of  a  fall  in  the 
interest  rate,  but  the  case  of  a  new  method  adopted  while  the  old  rate 
of  interest  still  prevails. 


Ch.  38]  ABSTINENCE  AND  PRODUCTION  497 

production,  and  their  present  desires  are  better  provided  for 
they  should  find  it  easier  to  abstain.  In  itself  this  should 
result  in  more  saving  and  a  lower  interest  rate.  But  the  final 
result  so  depends  on  changes  in  the  standard  of  living,  educa- 
tion, etc.,^  which  are  themselves  usually  elevated  by  more 
bountiful  production,  that  the  answer  is  not  easy.  The  ex- 
perience of  the  past  two  centuries  shows  that  our  progressive 
economic  societies  are  constantly  incorporating  into  their 
processes  great  improvements  which  raise  the  total  produc- 
tion of  objective  goods  per  capita,  while  they  maintain  about 
the  same  rate  of  interest  from  generation  to  generation.  Both 
present  and  future  expected  incomes  are  more  bountiful  than 
they  were  in  the  past,  but  the  ratio  of  their  time-valuation  re- 
mains substantially  unchanged. 

§  14.  Railroad  betterments  and  the  rate  of  interest.  The 
railroads  in  America  have  given  a  good  illustration  of  the 
relation  of  the  interest  rate  to  improvements.  In  railroad 
financing,  cost  of  operation  is  compared  with  fixed  charges, 
i.e.,  the  interest  on  the  bonds  needed  to  make  an  improvement 
that  reduces  costs.  Our  main  lines  in  America  were  built 
when  the  interest  rate  was  high  (before  1873).  Expensive 
improvements,  the  straightening  of  curves,  the  tunneling  of 
mountains,  the  reducing  of  grades,  the  replacement  of  lighter 
by  heavier  rails,  accompanied  a  fall  in  the  rate  of  interest.  A 
fall  in  the  interest  rate  disturbs  the  equilibrium  that  has  been 
arrived  at,  between  the  cost  of  operation  (the  amount  paid 
for  wages,  coal,  etc.)  and  the  income  on  permanent  investment. 
If  the  rate  of  interest  has  been  5  per  cent  and  falls  to  4  per 
cent,  many  permanent  improvements  before  unwise  become 
economical.  A  net  gain  may  result  from  increasing  the  cap- 
ital investment  in  order  to  reduce  the  cost  of  operation  per 
unit  of  traffic.  One  thousand  dollars  paid  annually  in  wages 
balances  a  5  per  cent  interest  charge  on  a  capital  investment 
of  $20,000;  it  balances  a  4  per  cent  interest  charge  on  $25,- 
000.  It  thus  becomes  profitable  for  the  railroad  to  abandon  or 
T  See  on  abstinence,  sec.  8,  above,  and  ch.  24. 


498  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Pt.  VI 

throw  aside  an  enormous  capital  represented  by  the  old,  less 
perfect  roadbed  and  equipment,  and  build  new  with  capital 
borrowed  at  a  lower  rate.  The  changes  of  this  kind  one  sees  in 
traveling  on  the  great  and  progressive  railroads,  reflect  in 
part  the  growth  of  traffic,  but  in  part  also  a  change  of  the 
interest  rate. 

§  15.  Effect  of  war  upon  the  interest  rate.  The  commonly 
observed  fact  that  a  great  war  calling  for  much  borrowing 
raises  the  interest  rate  is  easily  explained  as  the  undoing  of 
the  process  of  saving  and  loaning.  It  presents  a  case  of  waste 
on  an  enormous  scale.  Waste  and  destruction  are  in  their 
nature  and  in  their  main  effect  upon  time-preference,  interest, 
and  productive  processes,  just  the  converse  of  saving  and  im- 
proving wealth.  In  the  case  of  war  the  borrowing  comes  first, 
to  get  capital  with  which  to  buy  the  many  supplies  and  muni- 
tions needed  to  maintain  armies  and  navies.  Goods  are  de- 
stroyed in  enormous  quantities:  horses,  wagons,  gasoline, 
weapons,  ammunition,  ships,  foods,  clothing,  etc.;  great  num- 
bers of  men,  both  combatants  and  non-combatants,  are  with- 
drawn from  many  of  the  usual  productive  pursuits  and  are 
giving  every  energy  either  to  producing  munitions  of  war  or 
to  destroying  the  soldiers  and  the  wealth  of  the  enemy — roads, 
fields,  buildings,  machinery,  stores  of  all  kinds.  Within  the 
region  of  hostilities  the  economy  is  reduced  well  nigh  to  the 
stage  of  savagery.  Men  become  beasts  of  burden,  and  are 
obliged  to  carry  on  production  with  meager  equipment.  Even 
were  a  war  in  the  territory  of  two  modern  nations  limited  to 
a  few  months,  the  destruction  would  be  enough  to  consume 
the  usual  savings  for  years.  The  present  need  of  nations  at 
war  is  for  enormous  quantities  of  present  goods ;  after  the  war 
the  pressing  need  to  rebuild  their  houses  and  their  ruined  in- 
dustrial equipment  will  call  for  great  quantities  of  present 
goods  of  another  kind.  This  result  is  anticipated  at  the  very 
outbreak  of  hostilities.  The  interest  rate  rises,  and  the  capital- 
value  of  all  existing  securities  with  fixed  incomes  is  reduced 
accordingly.    During  the  continuance  of  the  war  the  rising 


Ch.  38]  ABSTINENCE  AND  PRODUCTION  499 

interest  rate  slackens  investment  in  industries  in  countries  at 
peace.  The  unparalleled  economies  of  the  people  of  warring 
nations,  the  lowering  of  their  standard  of  living,  the  cessation 
of  a  large  share  of  the  costly  entertainments  and  of  social 
luxuries,  and  the  sacrifices  they  make  to  support  their  govern- 
ments, go  far  to  offset  the  destruction,  and  thus  to  limit  the 
rise  of  the  interest  rate.  Notwithstanding  this,  the  world's 
industrial  equipment  halts  its  progress  and  goes  backward 
as,  through  the  medium  of  international  credit,  this  destruc- 
tive, anti-saving  process  of  war  spreads  its  effects  over  the 
nations. 


CHAPTER  39 
VALUE  THEORY  AND  SOCIAL  WELFARE 

§  1.  Epoch  of  the  dismal  science.  §  2.  Communism  and  value  theory. 
§  3.  The  single-tax  doctrine.  §  4.  Optimistic  theories  of  wages.  §  5.  An 
organic  theory  of  value.  §  6.  Labor  and  its  environment.  §  7.  Aspects 
of  wealth.  §  8.  Welfare.  §  9.  The  paradox  of  value  in  practice.  §  10. 
Conflict  of  individual  and  general  interests.  §  11.  Business  economy 
and  social  economy. 

§  1.  Epoch  of  the  dismal  science.  A  preliminary  word. 
The  foregoing  survey  of  the  dynamic  forces  and  changes  in 
economic  society  (Part  VI),  incomplete  as  it  is,  may  yet  serve 
in  some  measure  to  broaden  and  to  extend  our  understanding 
of  the  study  that  preceded  (Parts  I  to  V).  This  chapter  con- 
cluding the  outline  of  economic  principles  will  give:  first  (sec- 
tions 1-4),  a  suggestion  of  some  of  the  far-reaching  conclu- 
sions which  economic  students  have  in  the  past  drawn  from 
their  theories  of  value  in  respect  to  the  trend  of  popular  wel- 
fare; secondly  (sections  5-6),  a  general  summary  of  the  posi- 
tive theory  of  value  that  has  been  developed  in  its  details 
throughout  this  volume;  and  thirdly  (sections  7-11),  a  brief 
outline  of  the  relations  between  wealth  and  welfare,  value  and 
utility,  individual  advantage  and  the  general  good. 

The  value-theory  one  holds  is  sure  to  affect  one's  view  of 
economic  progress  and  one's  attitude  toward  projects  of  social 
reform.  The  theories  from  the  middle  of  the  eighteenth  to 
the  middle  of  the  nineteenth  century,  however  varied  they 
were  in  other  respects,  nearly  all  gave  a  gloomy  view  of  the 
condition  of  the  masses.     Such  were  the  theories  of  the  physio- 

600 


Ch.  39]  VALUE  THEORY  AND  SOCIAL  WELFARE  501 

cratic  school  in  France,  consisting  of  a  small  group  of  highly 
educated  and  aristocratic  men  of  liberal  sympathies  in  the 
generation  preceding  the  French  Revolution  of  1789 ;  of  the 
so-called  ''orthodox"  or  "classical"  economists  in  England 
composed  of  the  writers  from  about  1800  to  1850  that  were  in 
sympathy  either  with  the  landholding  or  with  the  commercial 
classes ;  and  of  the  socialistic  or  laboring-class  theorists,  from 
1789  to  the  present.  It  was  the  prevalence  of  such  a  view 
which  caused  Carlyle  to  characterize  political  economy  by  the 
term  still  sometimes  heard,  "the  dismal  science." 

However  greatly  these  various  groups  of  thinkers  differed 
in  other  respects,  they  united  in  the  belief  that  the  labor  in- 
comes of  the  masses  must  remain  near  the  starvation  point. 
Indeed,  this  was  little  more  than  a  generalization  of  the  ob- 
served conditions  of  the  time.  The  population  of  Europe  was 
increasing,  the  pressure  for  food  was  strong,  and  the  culti- 
vated area  was  not  increasing  proportionately.  While  all  the 
forms  of  industry  most  common  in  cities  were  increasing, 
while  the  wealth  of  the  cities  and  the  rents  of  rural  landlords 
were  increasing,  poverty  was  growing  among  the  peasantry. 
Owing  to  exceptional  conditions  this  was  especially  true  in 
England  during  the  Napoleonic  wars,  1793-1815.  (See  Chap- 
ter 34,  section  8.) 

In  this  situation  the  thinkers  of  that  period  confused  the 
truth  of  the  limited  powers  of  agricultural  land  with  the  false 
inference  and  prophecy  of  a  necessarily  decreasing  relative 
food  supply  and  decreasing  wages.  The  economic  theory  of 
the  "classical"  economics  centered  around  this  fact  and  the 
false  inference  from  it.  The  condition  of  the  masses  was  be- 
lieved to  change  rhythmically,  rising  from  time  to  time,  only 
to  return,  through  the  pressure  of  population,  to  its  former 
level.  Their  pessimism  was  all  due  to  their  view  of  the  food 
problem.  They  doubtless  underrated  the  forces  operating  for 
volitional  control.  In  another  regard  they  were  too  optimistic, 
for  they  had  no  thought  that  timber,  mineral,  and  other  nat- 
ural stores  might  be  exhausted,  with  the  result  of  decreasing 


802  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY      [Pt.  VI 

prosperity.  The  things  made  from  these  materials  were 
thought  to  be  the  "product  of  labor,"  and  capable  of  unlim- 
ited increase.  It  is  just  these  materials  whose  increasing  scar- 
city is  one  of  the  greatest  economic  problems  that  society  has 
now  to  face.     (See  Chapter  35.) 

§2.  Communism  and  value  theory.  The  "orthodox" 
economists  gave  currency  to  two  erroneous  doctrines:  (a)  that 
labor  is  the  sole  source  of  value;  and  (b)  that  the  laboring 
classes  must  forever  be  reduced  to  a  bare  subsistence.  They 
were  quite  heedless  of  the  use  that  would  be  made  of  these 
doctrines  in  political  discussion  to  attack  the  existing  order 
of  society.  They  did,  it  is  true,  modify  and  qualify  both  these 
doctrines,  sacrificing  thus  the  consistency  of  their  reasoning, 
while  gaining  in  common  sense  and  in  harmony  with  the  facts. 
The  communists,  however,  accepted  these  doctrines  in  their 
most  unqualified  form,  and  drew  from  false  premises  the  false 
conclusion  most  natural  for  the  human  mind,  that  the  existing 
order  was  fundamentally  unjust  and  hopeless  for  the  masses. 
For  if  wages  were  always  to  be  forced  to  a  bare  minimum  of 
subsistence,  it  followed  that  the  other  shares  (incomes  of  land- 
lords and  of  other  owners)  must  absorb  all  the  benefits  of  im- 
proved machinery,  better  methods,  and  general  industrial 
progress. 

The  communistic  theory  of  value  is  akin  to  the  "classical" 
theory  in  holding  that  capitalists  absorb  all  the  benefits  of 
progress.  But  the  communists  refused  to  recognize  that  any 
useful  and  necessary  service  in  social  production  is  performed 
by  the  owners  of  wealth,  or  by  the  savers  and  lenders  of  cap- 
ital, or  by  the  employers  of  labor.  They  did  not  even  attempt 
to  distinguish  the  part  in  the  production  of  value  due  to  man- 
ual labor  from  the  part  due  to  brains,  to  science,  to  art,  to 
supervision,  or  that  part  in  turn  from  the  part  due  to  the  sav- 
ing, conserving,  and  provision  of  the  agents  of  production. 
The  whole  elaborate  industrial  environment  and  its  skilful 
management  that  made  possible  modern  industry  they  took 
for  granted  as  at  the  laborer's  command  and  credited  to  him 


Ch.  39]  VALUE  THEORY  AND  SOCIAL  WELFARE  503 

the  whole  value  of  the  product.  All  profits  made  by  employ- 
ers were  called  robbery,  and  capital  was  looked  upon  merely 
as  the  weapon  by  which  the  act  was  committed.  They  ac- 
cepted the  conclusion  of  "orthodox"  economic  theory  and  mag- 
nified it,  declaring  that  under  a  competitive  condition  of  soci- 
ety the  laboring  man,  tho  he  produces  everything,  must  be 
forever  ground  down  in  hopeless  misery.  This  they  called 
"the  iron  law  of  wages."  They  held,  therefore,  that  the  only 
hope  of  the  laboring  masses  was  to  do  away  with  competitive 
society  and  to  substitute  for  it  the  governmental  control  of  all 
industry.^ 

§  3.  The  single-tax  doctrine.  The  single-tax  doctrine  of 
Henry  George  was  likewise  built  upon  a  value  theory,  Tho 
George  eloquently  denied  the  law  of  diminishing  returns  (in- 
cluding the  principle  of  proportionality  applied  to  land  uses), 
he  accepted  the  conclusions  that  the  classical  economists  drew 
from  it,  that  ground  rent  must  be  an  ever-increasing  share  of 
the  national  income.  He  believed  that  the  landholders  get 
all  the  gains  that  come  to  society  as  a  result  of  science,  inven- 
tion, and  machinery.  Hence  his  belief  expressed  in  the  title 
of  his  work, ' '  Progress  and  Poverty, ' '  that,  with  private  prop- 
erty in  land,  the  outlook  for  the  laboring  classes  is  hopeless. 
In  George 's  opinion  neither  wage-earners  nor  such  capitalists 
as  are  not  landholders  have  any  share  in  the  benefits  of  in- 
dustrial progress.  He  saw  no  problem  om  monopoly  anywhere 
except  in  connection  with  land  ownership.  The  evil,  as 
George  saw  it,  called  for  a  radical  measure  of  reform,  namely, 
the  taking  of  all  the  rent  of  land  (a  single  tax),  for  public 
purposes  as  a  common  instead  of  an  individual  income.    This, 

1  The  communist  theory  of  that  period  was  originated  or  elaborated 
by  such  men  as  Karl  Marx,  Friederich  Engels,  and  Ferdinand  Lassalle, 
labor  leaders  and  political  agitators,  who  found  a  ready  weapon  in  the 
bimgling  economic  analysis  of  the  time.  The  claim  of  a  scientifie  basis 
for  communism  (now  usually  called  social-democracy  or  socialism)  has 
continued  to  be  made  by  their  followers,  most  of  whom  still  boast  that 
it  is  nothing  but  the  (now  admittedly  defective)  orthodox  theory  of 
value  carried  to  its  logical  conclusion. 


504  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Pt.VI 

he  believed,  would  be  enough  to  replace  all  other  forms  of  tax- 
ation. 

§  4.  Optimistic  theories  of  wages.  Some  recent  theories 
of  value  have  assigned  to  labor  a  more  hopeful  position.  Most 
optimistic  was  "the  residual  claimant  theory,"  of  wages  pre- 
sented by  the  American  economist,  Francis  A.  Walker.  His 
view  was  that  the  various  shares  of  production,  such  as  land- 
rent,  the  income  from  machinery,  etc.,  and  the  enterpriser's 
profits,  were  fixed  by  forces  independent  of  wages,  and  any 
increase  in  the  output  must  therefore  fall  to  the  laborer  as  the 
residual  claimant.  This  appears  to  explain  somehow  the  rise 
in  wages  in  the  past  century,  but  the  fallacy  of  its  method  is 
evident.  It  involves  the  circular  reasoning  that  land-rent  (a 
surplus  over  cost  of  production)  is  fixed  regardless  of  wages, 
whereas  the  cost  of  production  itself  is  made  up  chiefly  of 
wages. 

Another  American  economist,  John  B.  Clark,  was  led  by 
his  theory  of  profits  to  a  most  hopeful  view  as  to  the  future 
of  wages.  Profits  he  considers  to  be  essentially  the  reward 
for  introducing  new  methods  into  the  productive  processes, 
which  gradually  accrue  to  the  general  benefit.  As  profits  thus 
disappear,  the  average  wage-earner  is  correspondingly  up- 
lifted. In  reaching  this  conclusion  Clark  omits  from  con- 
sideration the  growing  scarcity  of  natural  resources  and  nar- 
rows his  conception  of  profits  to  the  point  where  industry  is 
self -organizing  and  self -directing.  Some  facts  lend  support 
to  every  one  of  these  theories  of  social  progress,  radical  and 
conservative,  gloomy  and  hopeful,  but  other  facts  refuse  to 
be  harmonized. 

§  5.  An  orgfanic  theory  of  value.  Let  us  turn  from  nega- 
tive criticism  to  a  summary  of  the  positive  ideas  as  to  value 
that  are  contained  in  the  foregoing  chapters.  We  have  not 
been  content  with  an  easy  but  superficial  explanation  of  value. 
We  have  come  to  see  that  the  value  of  the  simplest  commodities 
(a  dozen  eggs,  a  pound  of  butter,  a  bushel  of  wheat),  is  a 
part  of  a  great  complex  problem.    We  have  not  explained  it 


Ch.  39]  VALUE  THEORY  AND  SOCIAL  WELFARE  605 

fully,  we  have  only  begun  to  understand  it,  when  we  take  the 
desires  of  a  group  of  traders  in  a  market  as  a  starting  point, 
and  have  even  drawn  a  diagram  showing  the  meeting  point 
of  price.  For  these  desires  in  turn  have  been  conditioned  by 
manifold  influences,  stretching  on  to  other  men,  other  goods, 
other  lands,  and  other  times.  Nor  can  we  rightly  conceive  of 
a  theory  of  value  as  being  a  thing  apart  from  a  theory  of 
usance,  of  labor-incomes,  of  time-preference,  etc.  These  are 
all  but  special  aspects  of  a  general  theory  of  value,  and  each 
must  be  thought  of  as  a  part,  or  aspect,  of  what  might  be 
called  an  organic  whole,  or  perhaps  better,  a  general  economic 
situation.  From  the  first  and  repeatedly  this  thought  was 
brought  to  the  reader's  attention,  in  treating  the  static  the- 
•  ories ;  ^  and  the  thought  has  pervaded  our  whole  discussion 
of  the  dynamic  aspects  of  economics.  In  respect  to  value,  as 
in  other  ways,  it  may  be  said:  "We  are  all  members,  one 
of  another. ' '  With  this  thought  now  clearly  in  mind  we  may 
take  a  final  view  of  the  subject. 

The  productive  process  is  a  unity  and  the  values  of  the  dif- 
ferent agents  and  incomes  in  our  actual  economic  organization 
bear  a  mutual  relation  to  each  other.  Yet  the  unit  itself  (the 
total  to  be  divided  in  an  industry)  rises  or  falls  as  a  result  of 
many  forces  cooperating  or  conflicting;  any  share,  therefore 
(as  that  of  the  laborer),  depends  both  on  the  size  of  the  total 
product  and  on  the  proportion  he  gets  out  of  it.  The  factors 
and  agents  of  production  mutually  employ  each  other  and  thus 
prices  are  fixed  by  reciprocal  demand.  (See  Chapter  34.)  The 
value  of  any  one  in  terms  of  the  other  rises  as  its  relative  quan- 
tity and  efficiency  fall  and  falls  as  its  quantity  and  eflSciency 
rise.  But  the  absolute  amount  of  goods  obtained,  the  income 
obtained  by  any  one,  may  and  does  rise  with  its  quantity  and 
efficiency  and  vice  versa.  Labor  and  natural  materials  are 
complementary  agents,  and  the  more  abundant  and  accessible 

2 Among  many  examples  note:  ch.  7,  sees.  9,  10;  ch.  13,  sec.  4; 
ch.  15,  sec.  11;  ch.  18,  sec.  10;  ch.  27,  sec.  18;  ch.  28,  sec.  10;  ch.  30, 
sec.  3. 


506  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Pt,  VI 

the  natural  stores  of  materials,  the  larger  the  whole  product  of 
industry  and  the  larger  also  the  share  of  the  price  that  is  attrib- 
uted to  the  labor.  Real  wages  must  vary  (other  things  equal) 
with  available  supplies  of  elementary  materials,  rising  when 
they  become  relatively  more  abundant,  and  falling  with  their 
exhaustion  or  relative  diminution.  This  is  illustrated  broadly 
by  the  high  real  incomes  of  the  common  laborer  in  new  coun- 
tries, despite  some  other  adverse  conditions,  and  by  the  lower 
incomes  in  countries  poor  in  natural  resources.  As  those  nat- 
ural resources  that  are  exhaustible,  as  lumber,  coal,  and  metal 
ores,  grow  less,  their  money  price  rises.  That  makes  the  pur- 
chasing power  of  a  day's  labor  less  in  exchange  not  only  for 
those  raw  materials,  but  for  everything  which  those  materials 
are  indirectly  helping  to  create.  It  is  possible  to  counteract* 
this  effect  in  part  or  wholly,  temporarily  or  permanently,  by 
substitutions  and  by  other  improvements,  and  by  the  discovery 
of  new  resources  beneath  the  surface  of  the  earth. 

Even  when  population  is  stationary  or  decreasing,  an  abso- 
lute decrease  of  the  supplies  of  many  of  the  principal  natural 
materials  is  certain  to  take  place  and,  in  so  far,  real  wages 
may  be  reduced.  A  decreasing  food  supply,  on  the  contrary, 
can  hardly  occur  with  a  stationary  or  slowly  increasing  popu- 
lation such  as  results  from  effective  volitional  control. 

Change  in  the  artificial  agents  for  shaping  and  moving 
things  is  the  second  great  objective  cause  of  changes  in  wages. 
It  has  been  shown  (Chapters  12  and  36)  how  the  utilization  of 
wealth  is  affected  by  scarcity  and  abundance  of  agents,  and 
how  saving  increases  the  bounty  of  agents,  improves  the 
methods  of  production,  and  benefits  the  community  as  a 
whole,  including  those  who  have  had  no  part  in  the  saving 
(Chapters  24  and  38).  Thus  from  several  sides  it  has  been 
seen  how  the  necessary  influence  of  a  decaying  equipment  of 
tools  must  force  laborers  to  lower,  less  effective,  margins  in 
the  existing  stocks  of  tools,  and  on  the  other  hand  how  the  rela- 
tive increases  of  tho.se  agents,  and  the  growth  of  science  and 
invention,  tend  toward  the  raising  of  production  and  of  the 


Ch.  39]         VALUE  THEORY  AND  SOCIAL  WELFARE  607 

proportion  going  as  wages.  Other  things  being  equal,  real 
wages  vary  with  the  agencies  for  shaping  and  moving  things, 
rising  when  they  become  relatively  more  abundant  and  effec- 
tive, and  falling  if  they  decline.  Except  as  affected  by  the 
increasing  scarcity  of  some  elemental  materials,  the  reason- 
able prospect  is  that  tools  and  machinery  will  steadily  be 
multiplied  in  number  and  improved  in  efiSciency.  This  is  a 
basis  for  optimistic  prophecy.^ 

§  6.  Labor  and  its  environment.  Decreasing  and  increas- 
ing returns  are  cases  of  changing  proportionality,  involv- 
ing social,  rather  than  individual  adjustment;  not  the  ad- 
justment of  enterpriser's  money  cost  to  prices,  but  of  the 
whole  labor  supply  in  relation  to  the  employment  afforded  by 
its  environment.  The  individual  employer  thinks  of  the  sup- 
ply of  labor  as  consisting  of  men  seeking  employment  in  his 
special  industry.  In  this  view  it  is  the  demand  of  the  em- 
ployers that  apportions  the  workers  among  the  various  occu- 
pations, and  seems  to  determine  wages.  The  social  view  of 
the  opportunity  for  labor,  however,  looks  at  the  whole  field. 
The  opportunity  for  labor  is  then  seen  to  be  represented  ulti- 
mately not  by  human  employers,  but  by  resources  and  agents 
which  labor  can  use.  The  rich  acre,  the  tool,  the  machine, 
all  material  wealth  needing  the  human  touch  to  utilize  it,  rep- 
resent opportunity  for  labor  in  this  sense.  The  employers' 
demand  for  labor,  therefore,  is  but  a  reflection  of  the  oppor- 
tunities embodied  in  resources.  A  million  men  are  a  great  or 
a  small  population  according  as  they  occupy  a  little  island  or 
a  large  continent,  according  as  they  are  equipped  with  a  small 
or  a  large  supply  of  agents. 

3  The  wage-fund  doctrine  of  wages  once  held  a  central  place  in  economic 
discussion.  It  was  that  wages  were  determined  by  the  relation  of  the 
number  of  laborers  to  the  capital.  "Capital"  was  taken  in  the  narrow 
sense  of  a  special  fund  set  aside  (it  was  never  quite  clear  how)  by 
the  employers  for  the  payment  of  wages.  The  element  of  truth  in  the 
doctrine  was  the  recognition,  somewhat  dim,  that  wages  are  favorably 
affected  by  the  efficiency  of  the  whole  economic  environment  in  which 
labor  works. 


508  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Pt.  VI 

§  7.  Aspects  of  wealth.  Wealth  is  the  general  term  for 
those  things  which  are  felt  or  seen  to  be  related  to  the  grati- 
fication of  desires.  This  definition  is  wider  or  narrower  ac- 
cording to  the  senses  in  which  the  various  words  are  taken. 
"What  is  included  in  * '  things ' '  ?  How  deeply  are  they  felt  and 
how  far-sightedly  are  they  seen  to  be  related  ?  How  immedi- 
ate is  the  gratification?  Individual  wealth  is  usually  taken 
to  mean  the  valuable  things  the  individual  owns.  Some  would 
include  "internal  goods,"  such  abstract  qualities  as  honesty 
and  cheerfulness;  others  would  include  not  abstract  qualities 
but  men  themselves  with  all  their  capacities  of  body  and  mind ; 
the  free  man  owning  himself  and  his  powers  to  serve  his  own 
desires,  the  slave  being  owned.  More  frequently,  and  prop- 
erly, the  term  individual  wealth  is  limited  to  valuable  agents 
objective  to  men,  not  including  free  men.  There  is  much 
popular  usage  in  favor  of  including  documentary  evidences  of 
ownership  such  as  notes,  mortgages,  stocks,  and  other  credit  in- 
struments, by  so  doing  making  private  wealth  (tho  not  always 
consistently)  synonymous  with  capital  in  our  definition. 
There  is  good  reason  to  keep  the  term  wealth  for  the  concrete 
things  while  using  capital  as  the  value  expression  of  business 
power  embodied  in  those  things.  Thus,  the  factory  is  wealth, 
the  economic  basis  for  the  capital  represented  by  stocks  and 
bonds;  the  farm  is  wealth,  the  economic  basis  of  the  mortgage 
and  of  the  owner's  residual  claim  to  the  unmortgaged  capital 
value. 

Social  wealth  is  a  broader  term  and  includes  all  the  weal- 
bringing  environment  of  the  nation.  It  is  more  than  the  sum 
of  concrete  individual  wealth  (factories,  farms,  etc.,  of  course 
all  conflicting  claims  being  canceled)  ;  it  includes  the  valuable 
things  held  in  governmental  possession,  such  as  parks,  forests, 
public  buildings,  libraries,  bridges,  highways,  and  public- 
owned  wealth,  etc.,  and  also  all  the  natural  advantages  of 
climate,  rivers,  harbors,  lakes,  and  oceans.  The  better  and 
more  beautiful  these  advantages,  the  less  may  be  the  need  of 
individual  wealth;  one  nation  with  natural  waterways  may 


Ch.  39]  VALUE  THEORY  AND  SOCIAL  WELFARE 


509 


be  truly  wealthier  than  another  with  canals  costing  millions 
of  dollars  and  owned  by  corporations ;  and  a  nation  with  abun- 
dant cheap  lands  of  low  price  is  more  happily  situated  than 
one  with  high-priced  lands  that  yield  great  private  incomes 
to  the  owners. 

§  8.  Welfare.  "Welfare,  in  an  immediate  or  narrow  sense, 
is  the  same  as  gratification  of  the  moment ;  in  a  broader  and 
truer  sense  it  is  the  abiding  condition  of  well-being.  We  have 
here  a  distinction  very  much  like  that  often  made  between 
pleasure  and  happiness.  If  only  the  present  moment  is 
thought  of,  welfare  is  the  absence  of  pain,  and  the  presence 
of  pleasurable  feeling;  but  if  a  longer  period  in  a  man's  life 
or  his  entire  lifetime  is  considered,  it  is  seen  that  many  things 
that  afford  a  momentary  gratification  do  not  minister  to  his 
ultimate,  or  abiding,  welfare.  The  difference  is  illustrated  by 
the  thoughtlessness  and  impulsiveness  of  a  child  or  savage  as 
contrasted  with  the  more  rational  life  of  those  with  foresight 
and  patience. 

Now  it  is  evident  that  a  large  part  of  the  value  of  individual 
wealth  rests  on  the  basis  of  foolish  and  shortsighted  choice. 
But  whether  tobacco  or  alcohol  or  morphine  minister  to  the 
abiding  welfare  of  the  consumers  is  not  the  question  in  ex- 
plaining the  value  of  these  things.*  Here  again  it  is  seen  how 
poor  an  index  the  value  of  individual  wealth  is  to  the  perma- 
nent welfare  of  men  and  society. 

In  studying  the  question  of  social  prosperity  we  must  rise 
to  the  standpoint  of  the  social  philosopher  and  consider  the 
more  abiding  effects  of  wealth.  Desires  may  be  developed  and 
made  rational,  and  the  permanent  prosperity  of  a  community 
depends  on  this  result.  Any  species  of  animals  that  continued 
regularly  to  enjoy  that  which  weakens  the  health  and  strength 
would  become  extinct.  Any  society  or  individual  that  con- 
tinues to  seek  its  pleasures  in  ways  that  do  not,  on  the  aver- 
age, minister  to  permanent  welfare,  sinks  in  the  struggle  of 
life'  and  gives  way  to  those  men  and  nations  that  have  a 

4  See  also  ch.  19,  note  on  value  versus  utility  of  labor. 


510  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Pt.  VI 

sounder  and  healthier  adjustment  of  choice  and  welfare.  "We 
touch  here,  therefore,  on  the  edge  of  the  great  problems  of 
morals,  and  while  we  must  recognize  the  contrast  that  often 
exists  in  the  life  of  any  particular  man  between  his  "pleas- 
ures" and  his  health  and  happiness,  we  see  that  there  is  a 
reason  why,  on  the  whole,  and  in  the  long  run,  these  two  can 
not  remain  far  apart.  The  old  proverbs,  "Be  virtuous  and 
you  will  be  happy,"  "Honesty  is  the  best  policy,"  and 
*' Virtue  is  its  own  reward,"  have  a  sound  basis  in  the 
age-long  experience  of  the  world.  Cynics  or  jesters  may 
easily  disprove  these  truths  in  a  multitude  of  particular 
cases. 

§  9.  The  paradox  of  value  in  practice.  A  necessary  con- 
dition of  value  is  scarcity.  The  business  incomes  of  individ- 
uals depend  on  the  price  of  the  agents  and  uses  they  control. 
It  appears  in  the  paradox  of  value  (Chapter  4,  section  11) 
that  up  to  a  certain  point  the  total  value  increases  with  the 
number  of  units  offered  in  a  market,  and  beyond  that  point 
it  decreases.  In  the  period  of  increasing  total  price  (tho  de- 
clining unit  price)  any  one  who  owned  the  whole  supply  would 
gain  by  abundance  and  his  interest  would  be  in  harmony  with 
the  interests  of  the  buyers  of  his  goods ;  beyond  that  point  he 
would  gain  by  greater  scarcity.  This  individual  gain  some- 
times may  lie  in  social  want  rather  than  in  social  wealth. 
Broadly  speaking,  so  long  as  value  is  on  the  ascending  curve 
and  income  grows  with  abundance  of  goods,  the  individual  in- 
terest is  bound  up  with  the  social  interest.  So  soon  as  value 
is  on  the  descending  curve  and  private  income  grows  with 
social  need,  the  individual  interest  is  at  conflict  with  the 
social  interest,  and  a  problem  of  social  control  is  presented. 
Fortunately,  in  most  cases  the  individual  is  concerned  only 
with  the  ascending  scale  of  total  value  and  can  increase  his 
private  income  only  by  striving  for  abundance,  increasing  the 
number  of  units  he  has  to  offer.  A  social  problem  is  pre- 
sented wherever  individuals  or  corporations  control  such  a 
large  proportion  of  the  whole  supply  at  a  particular  time  and 


Ch.  39]         VALUE  THEORY  AND  SOCIAL  WELFARE  611 

place  that  they  are  tempted  to  increase  their  private  incomes 
by  artificially  enhancing  scarcity. 

In  other  cases  scarcity  grows  inevitably,  as  in  the  exhaus- 
tion of  natural  deposits  or  the  relative  decrease  of  favored 
building  sites  for  commerce  and  of  tillable  land  for  food  when 
population  grows  rapidly.  Each  individual  controls  such  a 
small  portion  of  the  supply  that  he  gains  only  by  striving  for 
abundance  (planting  new  forests,  discovering  and  developing 
new  mines,  clearing,  draining,  irrigating,  and  fertilizing  more 
fields)  ;  but  with  growing  scarcity  of  the  whole  supply,  price 
per  unit  rises.  Where  supply  is  absolutely  falling  off  (ex- 
haustion of  natural  stores  of  timber,  coal,  and  metals)  this 
rising  price  per  unit  partly,  wholly,  or  more  than,  compen- 
sates the  owners  for  the  decreasing  quantity;  where  supply 
is  only  relatively  declining  (same  supply  at  a  higher  price) 
each  owner  gains  and  the  whole  group  of  owners  gain  by  the 
scarcity,  without  themselves  helping  to  bring  about  the  change. 
Thus  again  it  is  seen  that  value  is  not  identical,  indeed  may 
be  in  contrast  with  utility.  Individual  incomes  depend  pri- 
marily upon  value,  and  therefore  individual  gain  may  be  as- 
sociated in  many  cases  with  scarcity  and  not  with  abundance. 

§  10.  Conflict  cf  individual  and  general  interests.  The 
social  welfare  has  no  reality  apart  from  the  abiding  happiness 
of  individuals  and  progress  toward  a  higher,  nobler  form  of 
social  life.  The  individual  members  of  society  are  guided 
mainly  in  their  business  activity  by  value,  as  that  determines 
their  incomes,  and  the  value  of  the  services  rendered  is  a  very 
inaccurate  index  either  of  the  welfare  of  the  individual  con- 
sumer or  of  the  social  group.  Both  labor-claims  and  capital- 
claims  on  income  reflect  values;  they  do  not  always  reflect 
the  true  welfare  of  individuals  or  of  society.  Labor  and 
wealth  sometimes  are  applied  to  nerve-destroying  and  life-de- 
stroying pleasures,  because  the  panderer  to  vices  can  get  a 
larger  income  in  that  way  than  in  any  other.  Gamblers  pro- 
vide means  for  the  indulgence  of  a  common  weakness  that 
gives  a  pleasurable  excitement  but  that  undermines  the  f  ounda- 


612  DYNAMIC  CHANGES  IN  ECONOMIC  SOCIETY       [Pt.  VI 

tions  of  social  prosperity.  Able  lawyers  render  highly  paid 
services  to  enable  individual  criminals  to  escape  the  penalty 
of  the  law  or  wealthy  corporations  to  destroy  competitors,  es- 
tablish illegal  monopoly,  and  secure  anti-social  gains.  Em- 
ployers have  profited  through  defeating,  with  superior  legal 
talent  and  powers  of  endurance,  the  claims  of  workmen. 
Manual  laborers  often  shirk  work  when  not  under  the  master 's 
eye  and  draw  their  wages  for  dishonest  service.  The  primary 
purpose  of  most  men  in  industry  is  to  acquire  income,  and  they 
leave  the  purchaser  to  look  after  his  own  welfare.  For- 
tunately, however,  in  many  cases  acquisition  of  income  is  con- 
ditioned on  production  of  welfare,  and  some  worthy  stand- 
ards of  business  honor  are  found  in  every  class  of  society. 

In  this  regard  what  is  true  of  income  from  labor-services 
is  true  of  capital.  Capital  is  the  saleable  value-expression  of 
expected  incomes,  no  matter  what  the  source  of  the  incomes 
may  be,  whether  rentals  of  vice,  gains  of  monopoly,  men- 
dacious advertising,  or  the  growing  scarcity  of  natural  agents. 
To  identify  growth  of  capital  with  national  prosperity  is  fal- 
lacious. Capital  is  a  private  business  concept,  and  tho  in  many 
cases  it  is  the  present  worth  of  real  productive  agents,  in 
others  it  reflects  the  claim  of  one  individual  against  another 
rather  than  a  claim  upon  objective  goods,  relative  scarcity 
rather  than  abundance,  a  summation  of  value  rather  than  of 
welfare. 

§  11.  Business  economy  and  social  economy.  Not  with- 
out reason  it  has  been  made  a  reproach  to  economic  writers 
that  they  often  have  confounded  business  incomes  (and  espe- 
cially those  of  a  limited,  influential,  class  in  society)  with  gen- 
eral social  welfare,  and  have  identified  individual  acquisition 
with  social  production.  Business  economy  has  been  mistaken 
for  true  political  economy,  commercial  profits  for  social  wel- 
fare. 

The  right  understanding  of  the  nature  of  value  and  of  cap- 
ital makes  possible  a  clearer  distinction  than  before  between 
business  economy  and  social  economy.    Men  can  not  to-day, 


Ch.  39]  VALUE  THEORY  AND  SOCIAL  WELFARE  513 

in  view  of  the  truths  set  forth  above,  cherish  the  error  that 
"whatever  is,  is  right"  in  the  distribution  of  incomes.  We 
must  recognize  the  fact  that  in  all  times  and  countries  and 
still  to-day  there  is  in  public  and  private  business  more  or 
less  favoritism,  bribery,  monopoly,  and  dishonesty,  which  give 
to  some  men  more  than  the  economic  law  of  value  would  ex- 
plain or  warrant.  "We  must  recognize  further  that  the  law  of 
value  itself  is  not  necessarily  the  law  of  justice,  that  the  in- 
comes resulting  from  values  in  the  world  as  it  is  do  not  always 
meet  an  ethical  test.  The  problem  of  the  social  control  of 
industry  is  largely  that  of  determining  when  incomes  that 
accrue  to  individuals  are  in  harmony  with,  and  when  they  are 
adverse,  to  the  general  weal.  A  number  of  these  questions 
will  be  considered  and  an  attempt  will  be  made  to  answer  them 
in  accord  with  fundamental  economic  principles,  in  a  later 
volume  on  "Modern  Economic  Problems." 


INDEX 


INDEX 


Ability,  rarity  of,  207 

Abstinence,  285,  287,  465,  482-499; 
see  also  Saving 

Agriculture,  principle  of  propor- 
tionality in,   131 

Agriculture,   sec  land 

Annuities,  284 

Auction,  53,  57,  66 


B 


Bargaining  power,  221 

Barter,   42-49,   53 

Basic  material   resources,  442-455 

Bastiat,    Frederic,   471 

Bidders,  54;  for  land  usance,  165; 

for  labor,  214;   for  loans,  307 
Binet  test,  179 
Biologic,    basis    for    choice,    240; 

stage  of  population,  411 
Birth  rates,  431 
Bodio,  Luigi,  426 
Bonds,  276,   283 
Borrowers,  classes  of,  290;   profit 

seeking,  335 
Building    and    loan    associations, 

290,  298 
Business  economy,  512 
Buyer,     most     urgent,     63;     and 

seller,  44 
Buyers'  composite  valuation  curve, 

61 


Cairnes,  J.  E.,  221 

Cannan,  Edwin,   440 

Capital,  266,  267,  278,  280,  334, 512 


Capitalization,  and  money,  262- 
272;  definition,  267;  of  mone- 
tary incomes,  273-284;  and  in- 
terest, 300-313;  clue  to  interest 
rate,  308 

Capitalist,  active,  319;  passive, 
319 

Carlyle,   Thomas,    501 

Caste,  and  efficiency,  190 

Chance,   and   choice,   359 

Changes,   see  Dynamic 

Charging  what  the  traffic  will 
bear,  376 

Child  labor,  177 

Choice,  origin,  12;  development, 
13;  and  value,  12-21;  increas- 
ing range  of,  90;  between  pres- 
ent and  future,  104;  of  occupa- 
tions, 202-209;  and  chance,  359; 
animal,    478;    primitive,    478 

Clark,  J.  B.,  504 

Coal,  consumption  of,  450 

Commercial  paper,  304 

Communication,  and  markets,  68 

Communism,  and  value  theory,  500 

Competition,  and  monopoly,  73-85 ; 
and  custom,  158;  and  cost,  369; 
prices  under,  377,  379 

Competitive,  rents,  158;  wages, 
214;   prices,  369 

Complementary,  agents  at  the  two 
margins,  130;  usance-value  of, 
140;  goods,  34;  quality,  34 

Conklin,  E.  G.,  71 

Conservation    of    resources,    442  fT 

Conservation,  commission  report, 
444,  445,  446 

Consumption,  and  duration,  111- 
121;  of  material  resources,  see 
Basic 


617 


S18 


INDEX 


Consumptive  uses,  111,  114 

Contractual,  indirectness,  93;  and 
non-contractual  incomes,  318 

Corporate   securities,   280 

Corporations,  323 

Cost,  defined,  123,  349;  alterna- 
tive, 350;  money,  350;  and 
prices,  351,  355,  369,  380;  find- 
ing, 370;  classes  of,  373,  374; 
accounting,   375 

Cost  of  living,  in  various  coun- 
tries, 230 

Cotton  crop  in  the  U.  S.,  76 

Credit,  263,  304 

Cunningham,  William,   145 

Custom,  and  competition,  158 


D 


Death  rates,  432 

Deferred   payments,   see   Standard 

of 
Demand,  nature  of,  46;  elasticity 

of,  61 ;   and  supply,  67 
Democracy,  and  eflBciency,  190 
Depreciation,  115,  117;  funds,  279 
Desire,  25,  29,  35,  36,  38,  89,  479 
Diminishing,  gratification,  36,  48, 

69;  returns,  388,  435 
Direct  use,  29,  112 
Directness   of    use,    30 
Direction,   see  Management 
Discount,  269,  275,  302 
Discrimination,    see   monopoly 
Division  of  labor,  192;  in  manage- 
ment, 331 
Dismal  science,  501 
Doctrine,  11 
Drainage,  443 
Durable  goods,  114 
Durability,  artificial,  of  land,  117 
Duration-relation,    111;    see    also 

Consumptive 
Durative  use,  112 
Durative  goods,  beginnings  of,  255 
Durative    character    of    hydraulic 
power  sites,  454 


Dynamic,  130,  341;  change,  402; 
forces,  adjustment  to,  439;  fac- 
tor, labor  saving  inventions  as, 
457;  movement  of  saving,  482; 
see  also  Static 


E 


Economic  laws,  10;  goods,  23; 
utilization,  124;   agents,  171 

Economics,  definition,  3 ;  purpose 
and  value  of,  3-11;  social  aims 
of,  9 

Economists,  orthodox,  501 ;  classi- 
cal, 501 

Economy,  barter,  natural,  money, 
44;  of  repairs,  118;  of  large 
production,  see  Large  produc- 
tion 

Efficiency,  180;  factors  of,  184- 
188 

Engels,  Friederich,  503 

Elastic  demand,  in  monopoly,  82 

Elasticity,  see  Demand 

Employer,    see    Enterpriser 

Enterprise,  317-326;  and  risk, 
346,  358;    see  also  Profits 

Enterpriser,  319;  a  middleman, 
214,   299,   352 

Equilibrium  in  labor  market,  213; 
see  Static 

Ethical  wage,  214 

Ethics,  of  interest,  292,  300,  309 

Evaluation,  principles  of,  31—41 ; 
and  money,  50 

Expectation  valuations,  201 

Extensive  margin,  128;  utiliza- 
tion, 128;  movement  of  popula- 
tion, 430 


F 


Factors,   of  production,  317;    pro- 
portioning of,  340 
Failures,  in   business,  364 
Family,  size  of,  419 


INDEX 


519 


Fees,  for  services,  215 
Franchises,   value   of,   282 
Free  goods,  23 
Forests,  448 

Form,  value,  20;   agencies  for  al- 
tering, 96 
Future  use,  237;  discount  on,  271 

G 

General  economic  situation,  71, 
160,  227,  228,  312,  505 

George,  Henry,  503 

Goods,  and  psychic  income,  22- 
30;  free  and  economic,  23;  of 
direct,  present  use,  29;  comple- 
mentary, 34;  with  indirect  uses, 
92;  natural  diversity  of,  106; 
see  also  Uses  of  goods 

Gratification,  of  desire,  25;  and 
satisfaction,   26 

H 

Harmful  objects,  24 
Home  ownership,   150 
Homogeneous   units,   stock   of,   37 
Human  beings  and  their  economic 

services,  171-183 
Hydraulic   power,   454,  461 
Hypothesis,  11 


hastening  uses,  104;  of  lower 
rank,  105;  uses,  consumptive 
and  durative,  114;  agents,  capi- 
talization of,  269 

Indirectness,  90-94,  258-261,  494, 
496 

Individual  interests,  conflictine. 
511  ^ 

Industrial  revolution,  100;  evils 
of,  459 

Intelligence,  differences  in,  179 

Intensive  margin,  128;  use,  132; 
utilization,  127,  164;  cultiva- 
tion, 132,  433;  growth  of  popu- 
lation, 430 

Interchangeable  parts,  116 

Interest,  and  capitalization,  300- 
313;  origin  and  definition  of, 
301;  rate,  and  saving,  486;  and 
war,  498;  see  also  Abstinence 
and  production 

Interlocking  directorates,  335 

Invention,  and  interest  rate,  493, 
496 

Investment,  premiums,  311;  profit, 
345 

Irrigation,  443 


Joint  costs,  371 


Illiteracy  in  U.  S.,   188 
Imputation,  of  value,  209 
Income,    kinds,    26;    streams,    29; 
labor   as   contributing   to,    172; 
labor  and  wealth,  225;  rate  on 
capital,      274;      from      interest, 
gross  vs.   net,   303;    time  series 
of,    310;    and    abstinence,    489; 
see  also  Psychic 
Increasablcness  of  goods,  454 
Increasing   returns,    388,   435 
Indifference,   principle   of,   37 
Indirect,  uses,  92;   goods,  gradual 
improvement  of,  98 ;  agencies  for 


Labor,  16,  172,  176,  184-196,  197, 

198,  200,  203,  205,  206,  210,  211, 

218,  225,  228,  231,  507 
Labor-incomes,  197-210,  213,  225- 

228,  318,  505 
Labor-saving  inventions,  465;   see 

also  Machinery 
Labor  theory  of  value,  210,  228 
Laborer,  self-directing,  212 
Land,  116,  117,  143,  145,  159,  442, 

452 
Land-incomes,     capitalization    of, 

273 


520 


INDEX 


Land-values,    and    transportation, 

360 
Large   production,   388-393 
Lassalle,  Ferdinand,  503 
Law,  10 

Lease  of  land,  159 
Loans,  long-time,  306 
Location,  clement  in  value,  102 
Lump   of   labor   notion,    199,   458 
Luxury,  473-481 


M 


Machines,  and   tools,  99 

Machinery,  age  of,  99;  deprecia- 
tion of,  117;  and  wages,  456- 
407;  see  also  Tools 

Maine,  Sir  Henry,  144 

Malthus,  Thomas  Robert,  405,  415, 
424,  425 

Malthusian  doctrine,  405 

Malthusianism,  conclusion  on,  424 

Management,   323,   327-342 

Manager,   owner,   321 

Managers,  selection  of,  330 

Marginal  desire,  38;  valuation,  38; 
principle,  38;  in  time-prefer- 
ence, 253;  in  borrowing,  307 

Margin  of  utilization,  128;  usance 
value   and,    139 

Markets,   money  and,  50-60 

Market,  as  two-sided  auction,  66; 
effect  of  trading  outside,  65; 
effect  upon  valuations,  68 ;  price, 
see  Price 

Marx,  Karl,  503 

Mercantile  discounts,  304 

Middleman,   see  Enterpriser 

Mill,  John  Stuart,  357 

Mineral  stores,  450 

Money,  fur  as  a  unit  of,  15-16; 
and  markets,  50-60;  fimctions 
of,  262;  and  capitalization,  262- 
272;  buying  with,  273;  use  in 
saving,  289;  loans,  special  mar- 
kets for,  307 

Monopoly,    73-85,    381-388,    394- 


396;  discrimination  in,  84,  385, 
387 
Moral,    qualities,    181;    weakness, 
and  time-preference,  254 

N 

Natural,  prices,  74 ;  see  also  Price, 

Value,  Wage 
Nominal  wages;  see  Wages 
Non-competing     classes,     doctrine 

of,  219 
Non-consumptive    uses,    see    Con- 
sumptive 
Non-contractual,  see  Contractual 
Normal,    supply    price,    372;    cost 
price,  372 


Occupations,    rewards    and    sacri- 
fices of,  202;  choice  of,  203 
Owner-manager,  see  Manager 


Paradox  of  value,  39,  75,  510 

Pawn   shops,   293,   303 

Physiocrats,    102 

Place,  choice,  20;  and  time,  agents 
for  effecting  changes,  101-110 

Play,  174;  element,  in  valuation, 
202 

Population,  problem  of,  399-413; 
principle  of,  406-424;  quality 
of,  419;  volitional  doctrine  of, 
414-425;  of  the  world,  426;  in 
Europe,  428;  in  America,  429; 
relation  to  resources,  429;  and 
labor,  507 

Present  use,  239 

Present  and  future,  goods,  uses, 
desires,  247;   dollars,  311 

Price,  45;  money,  51,  262;  unit, 
52;  normal,  54;  levels,  56;  one 
in  a  market,  57;  principles  of, 
61-72;  in  a  market,  141;  of  the 
separable    use,    143;    of    labor. 


INDEX 


521 


211;  premium  concealed  in, 
293;  cutting,  376;  fixing,  mo- 
nopoly element  in,  394-396;  of 
wheat,  436 

Principle,  10;  see  also  various 
subjects 

Private  property,  264;  and  voli- 
tional control,  415;  and  saving, 
483 

Prodigal,  295 

"Producers'  rent,"  208 

Production,  as  betterment  of  na- 
ture, 119;  time-preference  in, 
252;  adjusted  to  changed  con- 
ditions, 341 ;  and  abstinence, 
482-499;  see  also  Large  produc- 
tion 

Productive  and  unproductive  la- 
bor, 173 

Profit,  borrower  for,  298;  and 
costs,  343-359;  definition,  343, 
350,  357,  358;  various  shades 
of,  358-368;  see  also  Enterprise 

Progress,  and  quality  of  popula- 
tion, 420;  and  desires,  477;  and 
luxury,  480 

Promoter,  334 

Property,  264 

Proportion,  in  technical  processes, 
107 

Proportionality,  in  repairs,  119; 
principle  of,  122-134;  depend- 
ence of  rent  on,  163;  principle  of 
in  population,  435;  in  static 
conditions,  439 

Proportioning,  of  the  factors,  340 

Psychic   income   and  goods,   22-30 

Psychic  income,  92,  200,  226;  in 
play,  174;  factor,  in  labor-in- 
comes, 203;  in  population,  408, 
424 

Psychological,  element,  in  supply, 
67;  change  in  time-preference, 
200;  explanation  of  interest, 
313 

Psycliology,  of  indirect  yaluation, 
109 


Quality,  a  reflection  of  desire,  31 


Railroad  betterments,  and  the  rate 
of   interest,  497 

Rank  of  agents,  see  Indirect 

Rate,  of  income,  and  price,  276 

Real  wages,  see  Wages 

Remuneration,  various  methods  of, 
229 

Rent,  definition,  155,  156;  piin- 
ciples  of,  158-168;  gross  and  net, 
156,  159;  variability  of,  168;  "of 
ability,"  208;  in  various  coun- 
tries, 230 

Rent-charge,    146,   283 

Renting,  of  agricultural  land,  147 

Renting,  contract,  147,  152-154 

Repair,  of  nature,  production  as, 
119;  of  land,  145;  economy  of, 
118;   time-preference  in,  250 

Reserve  valuations,  57,  165 

Residual   share,   318,  320,  322 

Rhythmic  changes,  of  population, 
437 

Ricardo,  David,  156 

Risk,  see  Enterprise 

Risk-taking,  in  produce  markets, 
365 

Roundaboutness,    see    Indirectness 


S 


Sacrifice,  123,  349 
Salaries,  large,  333 
Salogood,   defined,   45 
Satisfaction,    see   Gratification 
Savers,   and   spenders,   287 
Saving,    storehouse    of,   263;    and 

borrowing,   285-299;    conditions 

favoring,  483;  and  interest  rate, 

486 
Scarcity,     idea     of,     14;     various 

meanings  of,  note  on,  20 


622 


INDEX 


Self-employed,  319 

Seller  and  buyer,  44;  most  urgent, 

63 
Sellers'  composite  valuation  curve, 

63 
Separable    use,    125;    in    usance- 
value,    138;    price   of,    143;    see 
also  Uses 
Single  tax  doctrine,  503 
Smith,  Adam,  74,  81,  156,  182,  183, 

357 
Social,  welfare  and  economics,  9; 
factors   in  valuations,   70;    wel- 
fare, and  value  theory,  500-513 
Social  economy,  and  business,  512 
Specialization,  193 
Speculation,  3G3,  300,  367 
Spencer,   Herbert,    144 
Spenders,   see  Savers 
Standard,  see  Price  unit 
Standard    of    deferred    payments, 

263 
Standard    of    life,    417;    see    also 

Luxury 
Static,   130;    equilibrium,   in   land 
uses,    162;    and    dynamic,    390- 
404,  413;  conditions,  adjustment 
to,  438 
Stimuli,  effects  of  repeated,  36 
Stockholders,   investment  of,   325 
Stuff,   choice,   20;    value,   95;    and 
form,  agents  for   changing,  89- 
100 
Substitution,   of   goods,   32;    prin- 
ciple of,  33 
Supply,    nature    of,    46 ;    effect   of 
multiplicate  units  of,  55  ;  and  de- 
mand,   in    price    determination, 
67 


Talent,    inequality,    of,    182;    and 

occupation,    195 
Technic,  relation  to  time,  257,  496 
Technical  improvements,  economic 

test  of,  109;  processes,  107,  339 
Tendency,  of  population,  406 


Theory,  11 

Time,  choice,  20;  relation  to  value, 
103;  as  factor  in  usance  value, 
138;  relation  of  technic  to,  257, 
496;   consuming  process,  494 

Time-preference,  235-247;  rate  of, 
248-261 

Time-price,    269 

Time-value,  246;  in  labor-incomes, 
205 

Titchener,  E.  B.,  40 

Tools,  use  of  by  man,  97;  and 
machines,  99;  repair  of,  118;  in- 
tensive use  of,  133 

Trade  by  barter,  42-49 

Transportation,  and  markets,  58; 
effect  upon  value,  101;  and  land 
values,  361 

U 

Unearned    increment,    362 

Unique,   31 

Uniqueness,    of    separate   services, 

224 
Usance,   definition,    135;    of   land, 

143,   146;    of  men,    197 
Usance-value,  concept  of,   135-142 
Use-bearer,  consumption  and  dura- 
tion of,   112 
Uses,   doctrine  of   separable,   125; 
gross  and  net,   125;   of  wealth, 
and  labor,  197 
Uses  of  goods,  increasing  range  of, 
90;    hastening,    104,   242;    post- 
poning,   105,    243;    consumptive 
and   non-consumptive.   111 
Usufruct,   definition,   135 
Usury,  prohibition  of,  292 
Utility,   25;    and    value   of   labor, 

231 
Utilization,  intensive,  127;  exten- 
sive,  128 


Valuation,   14,   16;   marginal,  38; 
of     indirect     agents,     109;      of 


INDEX 


523 


agents,  personal,  165;  efficiency 
as  affecting,  167;  time  as  condi- 
tion in,  235 ;  of  durative  direct 
agents,   25G 

Valuations,  changes  of,  35;  bids  in 
relation  to,  54;  reserve,  57; 
effect  of  market  upon,  68;  so- 
cial factors  in  individual,  70 

Value,  19,  281;  and  valuation, 
note  on,  21 ;  and  true  welfare, 
24;  paradox  of,  39,  75,  510; 
various  changes  affecting,  94; 
location  as  an  element  in,  102; 
relation  of  time  to,  103;  of 
labor,  197-210;  imputation  of, 
209;  vs.  utility,  231;  genealogy 
of,  353;  organic  theory  of,  505 

Value  theory,  and  communism, 
505;  and  social  welfare,  500-513 

Vocational  guidance,  195 

W 

Wage,     "natural,"     212;     system, 

227 
Wage-contact,     bargaining     power 

in,    221 
Wage-fund  doctrine,  507 


Wages,  principles  of,  211-231;  and 

productivity,  218;  adjustment 
of,  223;  and  the  general  eco- 
nomic situation,  227 ;  real  and 
nominal,  219,  230;  in  various 
countries,  230;  and  machinery, 
450-^67;  minimum  of  subsist- 
ence theory,  502;  iron  law  of, 
503 

Waiting-period,    490 

Walker,   F.   A.,   357,  504 

War,  and  population,  412;  and  in- 
terest rate,  498 

Waste,  and  luxury,  468-481 

Water-power,  134 

Wealth,  and  labor,  197;  incomes, 
225;  and  property  rights,  265; 
contrasted  with  capital,  278; 
aspects  of,  508 

Wcber-Fechner  law,  40 

Welfare,  24,  25,  225,  509;  and 
capital,  512 

Wheat  prices,  436 

Willcox,  W.  F.,  427 


Years*  purchase,  274 


341)48 

DATE  DUE 

GAYLORO 

PBINTEO  IN  USA. 

